New Platts Middle East fuel price assessment may lead to pricing hub
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In the last few years, we have witnessed major changes in the oil industry. Persistently high oil prices and oil nationalism have led the major oil companies to retreat to the marginal plays which are less accessible and more expensive to produce. Developed countries, continuing to suffer from the financial crisis ofhave seen poor energy demand growth.
In the process, Asian oil companies have increased their trading activities supporting development of new trading hubs in the region. But what are the implications of these changes for Asian oil markets particularly with respect to energy supply security issues arising from a potential disruption in the Middle East? Disruptions in the Middle East Such would result in at least short term oil price spikes which would cascade through global oil markets.
While Asia writ large is very vulnerable to a potential disruption in ME oil, increasing oil supplies, shifting center of gravity in trading towards the continent and the increasing sophistication of Asian oil companies are factors contributing to rapid progress in reducing this impact of growing Asian oil dependence on the Middle East and exposure to political turmoil there on potential oil supply disruptions.
Asia is particularly dependent on oil supply from the ME see Chart 1 below. While Crude oil uk dubai platt price products and Korea have a typical Asian import profile Charts 3a and 3bChina is more diversified in its sources of supply Chart 2.
Data for are up to December Author takes full responsibility for any possible errors. However, this is largely a historical accident as Chinese refineries have traditionally had lower upgrading and hydro-treating capacity limiting the types of oil they could refine and therefore often needed oil imports from outside the ME. For example, low sulfur imports from Angola have historically been an important staple diet for the Chinese refineries.
However, with the crude oil uk dubai platt price products of Chinese upgrading capacity, this is changing. On top of high dependence on the ME, Asian oil stocks with the exception of Japan and China are relatively small and any supply disruption from this region would be a major shock for these economies at least in the short term. While the demand projections have been slightly adjusted upward since, the overall picture of likely plentiful supplies remains unchanged.
Being the only significant growth market, Asia is currently enjoying competition among the crude oil suppliers from the ME, offering increasingly better terms. This year, Iraq overtook Iran to become the fifth largest supplier to China.
This reinvigorated OPEC producer has also beaten Kuwait in getting the most recent term contract to supply a new refinery in China. Iran, hard hit by the US led sanctions has offered cheaper oil on delivered basis using subsidized shipping or even free shipping as in the case of India as a pricing weapon.
Abu Dhabi has signed a similar contract to lease storage in Yosu, Korea. Many similar deals are in the pipeline. Cash strapped Venezuela is supplying China and potentially India with oil on favorable pre-payment terms. Columbia and even Mexico have recently shipped oil to the East.
Newly built refineries in Asia have high upgrading capacity and therefore find heavy and cheap types of oil, often found in Latin America, more profitable to refine. Given the weakness in European demand, even the North Sea producers are struggling to find buyers. Even Canadian barrels have been moving east. This makes these barrels vulnerable to changes in market balances such as a switch by China to Latin American grades.
These grades have become more competitive following recent weakness in the WTI benchmark, against which these grades are priced. To facilitate these large arbitrage flows, Asian oil companies are integrating their trading operations. China Oil, a subsidiary of the second largest Chinese refiner, PetroChina, operates storage in the Caribbean to facilitate their Venezuelan imports.
Unipec, the trading arm of Sinopec, the largest Chinese refiner, handles all of their arbitrage using a truly global presence. They are sourcing oil using both term and spot directly from the producers and co-loading it whenever possible on more economical VLCCs for delivery into refineries in China.
Rather than relying on trading companies or oil majors to arbitrage these markets, they increasingly control the strategic oil flows themselves. Multi-billion dollar profits of Vitol, Glencore Trafigura and other trading companies have not gone unnoticed in Asia. Given the size of their refining systems and their financial muscle, Unipec and China Oil can be formidable competition even to the biggest majors and traders. These two state oil companies, as well as the largest Korean refiner SK, have become some of the main players in the Platts Pricing Window see Chart 4.
Even conservative Saudi Aramco is gearing up for product trading. On its website crude oil uk dubai platt price products, the Saudi oil crude oil uk dubai platt price products states that: Under the pressure of increasing competition, the trading companies have started looking for long term profits elsewhere: It is not a surprise then that Singapore and Dubai have become major global oil trading centers along with Tokyo, Hong Kong and others.
Large investments into storage capacity are reinforcing this activity. The Chinese state oil company Sinopec parent of the trader, Unipec is particularly prominent in this respect.
Their crude oil uk dubai platt price products new storage terminal built in Batam, near Singapore is due to open in The terminal will store This is an expansion of the Singapore trading hub including Indonesia and Malaysia, resembling Europe's Amsterdam-Rotterdam-Antwerp oil hub.
It will begin operations, later this year. This acquisition, together with its new projects in Batam and Fujairah, are likely to be a part of their global trading strategy. In Korea, construction of the first phase of the Ulsan storage hub will begin next year and phase two is expected to start in South Korea's expansion of the existing Ulsan storage hub will add a massive The first phase of the project with storage for 9. This would add momentum to ambitions by Korea National Oil Corp. Korea's largest oil storage facility, the 1.
The terminal can store 8. In spite of these developments, Asia is still lacking robust sweet and sour Markers that would accurately reflect regional fundamentals.
Markers are types of crude oil used as benchmarks against which all other types are priced. The main international price benchmark is Brent which actually consists of four different streams of North Sea oil: The main sour marker used in Asia is Dubai.
As chart 4 shows, the liquidity in Dubai trading during this window is significant and attracts a wide range of players, schweizer binaren optionen by traders.
However, these Dubai partials are essentially traded as a differential to Brent. They do not naturally trade in the market outside Platts Window. Most liquidity in the Asian crude oil markets is in Dubai swaps, an over-the-counter OTC derivative, because crude oil uk dubai platt price products regional buyers price their crude imports over one month average of all Dubai quotations as published by Platts during the calendar month of loading. Even though Dubai swaps trading may crude oil uk dubai platt price products to several million barrels per day, they are mainly traded either as swap spreads differentials between two loading months, for example, January vs.
February or as a differential to Brent futures contracts. This EFS is the primary mechanism for determining the value of Dubai swaps. In a nutshell, Dubai is not a real oil crude oil uk dubai platt price products Marker or benchmark, as its price is actually derived from Brent futures price.
Recently, Dated Brent, the Platts assessed value of physical Brent, has been adopted as a regional Marker for sweet crude oil in most of Asia. While Brent futures may be a reasonable benchmark for sweet crude worldwide as it trades well ahead of loading, Dated Brent is potentially problematic as it is reflecting prevailing conditions in the North West European markets within a different time frame.
For example, Dated Brent is assessed within days before loading whereas Asian sweet grades trade up to two months before loading. This lack of a regional benchmark may be detrimental for price discovery and optimal allocation in case of a major supply disruption in the region.
Traders exposed to a major supply disruption, as well as those speculating on such an event would hedge and trade Brent futures, the most liquid contracts.
Traders, facing a large price volatility in a portfolio, trade the most liquid assets in order to hedge and quickly reduce that volatility. Given that Dubai market is far less liquid, the brunt of the trading and hence price adjustments would be in the Brent futures market. Hence there is an anomaly in the Asian crude oil pricing, which would send the wrong price signals to the regional market.
In case of a ME disruption, the Asian sweet grades of crude, the obvious and immediate substitutes, would initially be overpriced as they are pricing off Dated Brent. Traders would bid for cheaper ME crude which is scarce while ignoring the crude oil uk dubai platt price products available oil because it would be too expensive.
The premiums for grades such as Oman, which loads outside the Gulf, but often prices off Dubai benchmark, would soar. The premiums for the regional sweet grades would go through a series of adjustments until their premiums to Dated Brent clear the market. In a nutshell, a ME supply disruption would cause the Asian markets to go through a period of severe confusion with mixed oil price signals. This could be avoided by having one or more robust Asian oil price benchmarks which would send immediate and correct price signals.
In conclusion, crude oil uk dubai platt price products the recent changes in the oil markets discussed are likely to have profound consequences, making Asia the new center of gravity for the oil crude oil uk dubai platt price products.
Asia will continue to flex it newly acquired muscle to claim its position as a major player in the oil markets. Increasingly, endogenous Asian companies will be challenging even the largest oil majors and trading companies. Regional trading hubs are likely to grow. This trend is likely to continue in the light of the recent instability in Crude oil uk dubai platt price products countries as diversification of supplies has become a major objective for many Asian consuming nations.
A large disruption in ME supplies would be a major shock for the region, as it is highly dependent on oil imports from Crude oil uk dubai platt price products. However, it is in a better position than ever before to handle it. Given that crude oil uk dubai platt price products forces are the best way to overcome such a disruption, improving regional markets and developing regional oil price benchmarks should be a new chapter in this development.
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