Harvey's Windfall for Asian Refiners Could be Short Term

 

Saudi Arabia, the world's biggest crude exporter and a major supplier to many Asian refiners, on Monday hiked its official selling price for October by more than expected.

 

The kingdom's benchmark Arab Light grade was boosted by $0.55 a barrel to a premium of $0.30 a barrel to the Oman/Dubai average, the highest price since December 2016, and a greater rise than the 20 to 50 cent-increase expected in a Reuters survey ahead of the announcement.

 

Asian refiners would have already been bracing for higher prices from Saudi Arabia, but it appears that Harvey may have prompted a bigger jump as the Saudis seek to achieve the dual aim of higher prices and tightening the crude market.

 

Asian refining margins hit a near two-year on Sept. 1 after flooding and other disruptions caused by Harvey knocked out about a quarter of U.S. refining capacity, or about 4.5 million barrels per day (bpd).

 

A typical refinery in Singapore processing Dubai crude is now enjoying a profit margin of about $10.21 a barrel, according to Reuters data, well above the moving 365-day average of $6.80.

 

Refiners across Asia have ramped up output to ship products to the United States, and to markets that are usually supplied by U.S. refineries.

 

But how long the party lasts is moot, with the price of U.S. gasoline futures dropping more than 3 percent on Monday as some of the affected refineries began restarting operations.

 

The risk for Asian refiners is that the boost to margins from Harvey lasts a relatively short time, while the crunch to profits from higher crude prices from major suppliers like Saudi Arabia is more sustained.

 

If the Saudis also follow through on their commitment to reduce exports, and not just output, then Asian refiners face the double whammy of lower supplies and higher prices.

 

Saudi Energy Minister Khalid al-Falih said on July 24 his country would limit crude exports to 6.6 million bpd in August, almost 1 million bpd below levels a year ago.

 

Official figures for August, as reported by the Joint Oil Data Initiative, are still a couple of months away but there is preliminary evidence from tanker-tracking data that suggests the Saudis have indeed cut exports.

 

The Saudis have also cut crude allocations to customers globally by about 520,000 bpd for September, Reuters reported on Aug. 8, citing an industry source.

 

Asian refiners, assuming they aim to keep run rates steady, will have to source crude from other suppliers, in addition to paying the Saudis more for reduced allocations.

 

This is likely to bump up the price of crude grades similar to what the Saudis supply.

 

The balancing act for the Saudis is weighing how much they can increase prices and lower supply against how quickly their Asian customers can find alternatives.

 

Certainly, it's likely U.S. crude exports from both offshore Gulf of Mexico and onshore shale basins in Texas will recover far more quickly than the region's devastated refineries.

 

This raises the possibility of more U.S. crude flowing to Asia to replace barrels not being supplied by Saudi Arabia, other members of the Organization of the Petroleum Exporting Countries, and their allies in the November agreement to cut crude output.