Asia remains awash with fuel, despite OPEC supply cut

OPEC supply cut have had little effect

Almost half-way into the OPEC supply cut, crude exports to Asia, the worlds’s largest and fastest growing market are reaching near record highs.

The surplus in Asia is expected to pressure global oil prices and weigh on budgets of major oil producing nations, but it may also help spur growth in demand needed to clean up excess supply.

Thomson Reuters Oil Research and Forecasts data shows about 714 million barrels of oil are being exported to Asia in March, up three per cent since December when cuts were announced.

Oil prices have fallen 10 per cent since January and analysts predict prices could drop even farther.

“Cuts are not enough to re-absorb the world’s excess supply. So, unless oil demand growth rebounds to record levels in 2017, oil prices could head for another substantial fall,”  Leonardo Maugeri, senior fellow at the Harvard Kennedy School’s Belfer Center for Science and International Affairs told Reuters.

Exports from the Middle East and Russia remain high despite the cuts, and record supplies are flooding into Asia from the Americas and Europe.

As a result, over 30 supertankers filled with oil sit off the coast of Singapore and southern Malaysia, even though the current price structure makes it unattractive to buy oil and store it for a later date.

Crude for delivery in January 2018 is only 70 cents more expensive than for delivery next May, making the floating crude storage vessels unprofitable.

Eikon data shows a record 10.5 million barrels of Russian Urals will arrive in Asia between April and June.

Kazakhstan, the North Sea, Brazil, and the United States crude exports arriving in Asia in March are expected to reach 45 million barrels, double the volume in the same month a year ago.

“The uptick in arbitrage has not gone unnoticed by the large Middle Eastern (OPEC) producers,” analysts from consultancy JBC Energy said in a note to clients this week.

In an attempt to ward off competition, OPEC’s de-facto leader Saudi Arabia unexpectedly cut light crude prices last week.  Saudi Aramco has also given additional supplies to Asian customers in April, trade sources said.

The competition and increased supplies have dropped prices for Middle East and Asia-Pacific grades, some of them to multi-month lows.

Traders say that because few producers will cut supplies deeply enough to end the glut and with increased US shale production, only strong demand can eventually rein in the surplus.

“Demand growth in Asia is about 700,000 b/d, so the glut will eventually clear,” Oystein Berentsen, managing director for oil trading company Strong Petroleum in Singapore told Reuters.

Not all are as confident.

Maugeri of the Belfer Center told Reuters”Enduring excess supply could be eased by a robust demand growth,” adding “but preliminary data and analyses do not portend such a development, especially because of a significant slowdown in demand growth in China and India – the two major engines of world oil consumption growth.”