Asian Refiners Face Challenges as Kuwaiti Crude Supply Declines
The reduction in Kuwaiti crude oil exports is causing a squeeze in supply for Asian refiners, leading to higher prices and tighter profit margins. Kuwait, an OPEC producer, has cut its exports by almost a fifth to meet the demands of its new refinery. This decline in supply, combined with previous cuts by Saudi Arabia, has left little room for Asian refiners who heavily rely on the Middle East for the majority of their crude imports.
Chinese refiners, in particular, have been hit hard by these supply shortages. Despite their investments in new plants designed to process sour oil, they are still exposed to the dwindling Kuwaiti supply. To alleviate some of the strain, Russia has stepped in with discounted oil to replace some of Kuwait’s lost exports, primarily supplying China and India. However, most of Kuwait’s customers will have to pay a premium for similar quality oil from alternative suppliers such as Saudi Arabia, Iraq, and the United Arab Emirates, or opt for more expensive sweet grades from other regions.
Industry analysts predict that Saudi Arabia and the UAE have the capability to fill part of the supply gap due to their production and export of medium sour barrels. However, it is unlikely that they will be able to fully meet the demand. Sustained output cuts from OPEC producers, along with the growth of new refining capacity designed for sour crude, suggest that tight supply conditions could persist until the end of 2024.
Kuwait’s crude shipments have already decreased by around 10% from January to July compared to the same period in the previous year. This decline is expected to continue in the second half of the year, with exports projected to be reduced by up to 18%. The diversion of supply to Kuwait’s newly operational Al Zour refinery is a significant factor in this reduction. Furthermore, the upcoming start of operations of the joint venture 230,000 bpd Duqm refinery in Oman is expected to further decrease Kuwaiti crude exports by up to 200,000 bpd in 2024.
The timing of the reduced Kuwaiti crude supply coincides with the commissioning of over 1 million bpd of Chinese refining capacity. The completion of several new refineries, including the Shenghong, Guangdong, and Yulong Petrochemical plants, has put additional pressure on the already limited supply. Chinese refineries, which are predominantly designed to process medium sour crude oil, are likely to face challenges in maintaining their profit margins, especially given the subdued product demand in the region.
Countries heavily reliant on Kuwaiti crude, such as China, Japan, South Korea, India, and Taiwan, are expected to experience further drops in supply from October. This is because Kuwait intends to resume supply to its Vietnam joint venture Nghi Son refinery after scheduled maintenance work. These countries will need to explore alternative crude oil sources to compensate for the decreased Kuwaiti supply. Taiwan’s Formosa Petrochemical Corp, for example, plans to replace Kuwaiti crude with grades such as Iraq’s Basra Medium, Qatar’s al-Shaheen, and Oman crude. They can also process U.S. light sweet crude.
The tightening supply conditions have already led to increased prices. Middle East crude exports are projected to decline by up to 8%, or 1.35 million bpd, in the second half of 2023. Middle East producers have responded to the tightening supply by raising their official selling prices for July to September supplies. Dubai crude, an important benchmark, has witnessed a rise in trading prices, with the price difference between the first and third month increasing significantly. Additionally, the discount for sour Dubai crude against sweet Brent crude has significantly narrowed.
Despite the challenges posed by the reductions in Kuwaiti crude supply, analysts foresee the potential for the Brent-Dubai spread to narrow again if Asian demand strengthens further. However, until then, Asian refiners will need to navigate the tight supply conditions and seek alternative sources to meet their crude oil requirements.
