Several oil refiners in Asia were taken aback by Saudi Arabia’s pledge to curb 1 million barrels a day of supplies from next month even as they planned for maintenance that will trim demand.
Refinery officials with plants across the region expressed surprise over the move ahead of the release of Saudi official prices and cargo allocations for February in the coming days. The decision by the kingdom might have taken into account plant closures in March-April and more virus-led stay-at-home advisories worldwide, they said.
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Oil futures in New York surged to a 10-month high and topped $50 a barrel on Tuesday after the deal by OPEC+. Riyadh’s pledge was dubbed a “new year gift” to the market, with Russia and Kazakhstan set to lift output by a combined 75,000 barrels a day in both February and March.
“The voluntary cuts were not expected and were a surprise to the market,” said Victor Shum, vice president of energy consulting at IHS Markit. “The immediate future of demand looks challenging and grim because of the ongoing increases in virus cases, and maintenance season in Asia also means less demand for oil.”
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The Saudis could be factoring in new waves of the coronavirus and lockdowns that will erode oil and fuel demand, said Mukesh Kumar Surana, chairman of Hindustan Petroleum Corp. “They don’t want prices to crash”, he said, adding that it’s still too early to comment on the full impact of the decision.
Buyers could turn to the spot market for prompt cargoes or short-haul supplies from Russian Far East producers if necessary, said traders. At least one Asian refiner would rely on supplies from Iraq should its Saudi flows be affected.
Idemitsu Kosan Co Ltd. will ensure stable crude supplies by using spot purchases as well as additional imports from term suppliers should the Saudis cut its volumes, a spokesman for the Japanese refiner said by phone. ENEOS Holdings Inc., Japan’s largest refiner, will also procure crude from the spot market if needed, said a company spokesman.
“We have a relationship with Saudi Arabia, but we are not dependent on Saudis alone,” said N. Vijayagopal, director of finance at India’s Bharat Petroleum Corp.“We also have Iraq as a predominant supplier of crude.”
State-owned Saudi Aramco is expected to announce its official prices for February-loading crude this week. The company typically informs customers of their volumes and liftings — a process known as allocations — around the 10th of each month. The kingdom’s decision reflects its will to keep oil prices supported, even as the move could incentivise more output from the U.S. shale sector.
What’s remains uncertain, however, is where Riyadh would choose to focus its curbs. Demand in Asia — its most prized market — has been leading the global recovery in consumption since last year on the back of rising Chinese industrial activity, even as the coronavirus continues to wreak havoc in top economies across Europe and the U.S.
Saudi Arabia’s decision to take one for the wider OPEC+ team is a stark u-turn from its strategy in the first of half 2020, when it slashed the price of its oil across grades and entered into a price war with rival producer Russia.
— With assistance by Serene Cheong, Sarah Chen, and Alfred Cang