Highlights
  • Asia has attracted most of the world’s marginal barrels of oil over the last decade
  • Falling oil demand in Europe has prompted British and Norwegian producers to send crude to markets east of Suez
  • Asian markets are awash with oil, leaving refiners there spoilt for choice
  • Russia overtakes Saudi as China’s No.1 supplier
  • Middle East looks to retain its dominance as a supplier of crude oil as countries there battle to protect their market shares, discounting their prices if necessary.

Introduction

As the main region of global demand growth, Asia has attracted most of the world’s marginal barrels of oil over recent years. Rising production from the Middle East is increasingly finding its way eastwards, as are crude oil exports from Africa, displaced from the US by the rise in production of similar light, sweet crudes. Falling oil demand in Europe has prompted British and Norwegian producers to send crude to markets east of Suez, and Latin American exporters are looking to Asia to absorb oil that might otherwise have gone to the US.

rThe result is often that Asian markets are awash with oil, leaving refiners there spoilt for choice. Exporters find themselves forced to offer discounts to Asian buyers in order to secure their custom and the outlook is for more oil to start heading for Asia, as demand elsewhere remains weak. Discounts are nevertheless little more than a short-term fix for sellers with excess crude. If they plan to increase their shares of the Asian market, or even just maintain their present positions, they will need to be a lot more creative in their marketing strategies.

Rising demand in Asia

Asia has seen the highest growth in demand and imports of any global region during the present century. Between 2001 and 2015, demand went up by 11.3 mn bpd, or 56.9%, to 31.3 mn bpd. The combined increase for the other world regions amounted to only 8.4 mn bpd, or 15.1%.

The next highest regional increase after Asia, 5.3 mn bpd, came from the Middle East, followed by Latin America and Africa, with 2.5 and 1.4 mn bpd, respectively. North America managed a paltry 0.1 mn bpd with European demand falling by 1.1 mn bpd (see table above).

The Asian share of global demand has also grown considerably: from 36.0% in 2001 to 67.1% last year. It is now the largest region in terms of demand, having risen from being second, behind the US and Canada, in 2001 (see table).

Asian Oil Demand
Asian Oil Demand

Growing imports

Over the same period, Asian imports of oil have grown dramatically: from 15.6 mn bpd in 2001 to nearly 29 mn bpd in 2015, which is a rise of 86.1%. The largest increase came from China, amounting to 6.4 mn bpd: a rise of 356.3%. Asia’s other main oil importer, Japan, saw a fall of almost 0.9 mn bpd or 16.5%.

Approximately 70% of Asia’s imports consist of crude oil, of which the Middle East is the principal supplier, with a market share of nearly 70%. Middle Eastern producers have been able to build up such a large presence in Asia by capitalizing on the region’s high dependence on imports of oil. Asia’s production of 7.8 mn bpd is sufficient to meet only about a quarter of its demand, causing concern about energy security in most countries across the region.

Forecast of changes in global oil demand
Forecast of changes in global oil demand

Middle Eastern exporters have managed to address these fears by offering their oil on long-term supply arrangements with evergreen contracts. They have also underlined their commitment to secure long-term supply contracts by leasing storage facilities on a long-term basis and allowing governments, in some cases, first call on inventories kept in Asia in the event of a disruption to global supplies. Saudi Arabia and the United Arab Emirates (UAE) have been to the fore in such arrangements.

Selling to Japan

Saudi Arabia and the UAE each have crude storage capacity of about 6.3 mn bbl in Japan, with the aim of supplying not only Japan but also other parts of East Asia. The Abu Dhabi National Oil Company (ADNOC) has storage in South Korea of nearly 50 mn bbl and is looking for sites elsewhere in Asia. In this way, Persian Gulf producers can convert some of their exports from long haul into short haul as far as Asian buyers are concerned, which both improves security of supply for Asian countries and allows the exporting countries to react quicker to rapidly changing market conditions.

As Asia’s second largest oil importer, Japan is of particular interest to Middle Eastern exporters. Many have a strong presence there already and are anxious to maintain, if not improve it.

Japan’s preoccupation with energy security, however, is beginning to wane. Poor refining margins and a stagnant domestic economy are causing refiners there to focus less on the issue of security of supply and more on the economics of their operations. For many years, Japan’s refiners have felt obliged to pay more than their Western counterparts for Middle Eastern crude in order to ensure regular long-term supplies. Their willingness to pay the “security premium” is now a good deal less. As a result, they are buying more spot crude, thereby reducing term supplies, and are a lot less conservative than they were a few years ago about running new crudes in their refineries.

The view in Japan, and to a growing extent elsewhere in Asia, is that the lack of demand growth in many other parts of the world make markets east of Suez increasingly desirable to oil-exporting countries. This indeed is the case, as is evidenced by the competition from new suppliers to sell oil to Asia. Among the relative newcomers are Algeria, Angola, Nigeria, Venezuela, Mexico, the UK, and Norway, all of which have seen their exports to the US fall because of rising production there, and, most recently, the US itself, where the rules that restricted the export of crude oil have been greatly relaxed.

Changing asian oil demand

Changing asian oil demandA similar attitude is emerging in China, where the deregulation of smaller refineries known as “teapots” or “tea-kettles,” has opened-up the market for imports amongst refineries that were until recently obliged to buy their crude and other feed stocks from China’s state refiners. Teapot refineries have recently been importing crude from Russia, Angola, and the UK.

Another country where the market for imports is opening-up to new suppliers is India, where there is the added attraction of its being Asia’s most rapidly growing oil market. Oil consumption there looks likely to increase this year by up to 0.4 mn bpd, compared with only 0.2 mn bpd in China.

African competition

India’s main supplier at present is Saudi Arabia. At present, there is a considerable competition among the Middle Eastern countries to supply India, thanks mainly to a rise in exports there by Iran and Iraq. In recent years, however, Nigeria has also made considerable inroads into the Indian market, along with other African exporters, notably Angola and Algeria.

All three have turned to Asia to replace lost crude oil sales to the US. Nigeria has concentrated on India, where earlier this year it was the fourth largest foreign supplier. Angola has gone mainly for the Chinese market, where it has consistently been amongst the top three foreign suppliers for a number of years. In the first half of 2016, it exported 885,000 bpd of crude to China: 11.8% of the total. West African countries currently export approximately 2 mn bpd to Asia.

Algeria has been able to double its exports to Asia so far this year thanks to competitive pricing. Its Saharan Blend light, sweet crude has been making inroads at the expense of some exporters of condensate, particularly Australia. Asia is becoming something of a battleground for the lighter crudes and condensates, prompted by a rise in production from within the Asia/Pacific region and from other areas such as the US, Iran, and Qatar.

Russia turns eastwards

The main competitor for African exporters–as well as those in the Persian Gulf, is Russia, which exports approximately 1.4 mn bpd to countries in Asia either by pipeline or by sea. The main overland link is a pipeline from East Siberia to the north of China, which has carried some 475,000 bpd so far this year. There is also a much smaller overland link to China via Kazakhstan.

Of Russia’s total Asian exports of 1.4 mn bpd for the first eight months of 2016, some 1.1 mn bpd went to China. Russia has plans to export more crude oil to Asia. This is as much for political as economic reasons. Hostility on the part of the European Commission to Russia has led to calls by the Commission for the European Union (EU) to reduce its dependence on imports of Russian energy. Russia is therefore actively pursuing a policy of increasing the proportion of its exports to Asia.

Oil supplies to Asia
Russia and Saudi Arabia compete to be the primary Oil supplier to China

Locking-in supply to Asia

As part of this policy, Moscow is adapting its domestic crude oil pipeline network to allow more Russian crude to be transported eastwards, including the building of new pipelines.

The Russians hope that these measures will provide them with steady and rising exports to Asia on a long-term basis, making their exports less reliant on spot sales and therefore less volatile in terms of their volume. Exports to Japan and South Korea, in particular, have fluctuated in recent months as refiners there have switched spot sales between ESPO and Middle Eastern crudes.

Moscow plans to lock-in more export volumes on a steady long-term basis by making them part of more comprehensive trading arrangements where possible. These include export deals linked to investments by Russian companies in Asian refineries and allowing Asian firms access to Russian oil through their involvement in upstream projects in Russia.

More exports for all?

Asia’s dependence on imported crude is expected to increase as demand grows and local production goes down. This should create export opportunities for a number of oil suppliers, and the volume of crude imported is likely to continue to increase. This year, for example, China’s teapot and other independent refiners have been importing four-times the number of crudes than they did in 2015.

For all this, though, the Middle East looks to retain its dominance as a supplier of crude oil as countries there battle to protect their market shares, discounting their prices if necessary. Middle Eastern exporters also have a greater capacity to go on increasing their oil production, unlike many of their rivals.

Supplies from Africa, Latin America, Australasia, and the North Sea are not expected to rise by very much. Russia should be able to continue exporting more by diverting exports away from Europe and towards Asia. The US also has room to add to its production and exports when global crude oil prices go up and stay up; but the principal gainers will nevertheless be the main oil-exporting countries of the Persian Gulf.

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References
  1. Condensate supply rises; but where will it go? Oil and Energy Trends 2015; 40:7; pp 3–6, DOI: 10.1111/oet.12261.
  2. Looking Ahead: Russia looks to Asia and the Middle East to beat EU sanctions. Oil and Energy Trends 2016; 41:7; pp 13–14, DOI: 10.1111/oet.12387.
  3. Oil exporters need to be more creative as Asian markets approach saturation; Oil and Energy Trends 2016; 41:12 pp 5-8
  4. http://oilprice.com/Energy/Crude-Oil/Russia-Makes-A-Move-On-Asian-Oil-Markets-As-OPEC-Cuts.html

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