Platts Analytics has revised lower Asian demand in the third quarter as a result of tighter restrictions in response to a spike of new coronavirus cases.
A version of this Spotlight from S&P Global Platts Analytics was first published August 16.
Platts Analytics has revised lower Asian demand in the third quarter as a result of tighter restrictions in response to a spike of new coronavirus cases.
In June, Asia’s most important countries (China, India, Japan and South Korea) crude imports dropped to their lowest so far this year at around 18 million b/d , down 500,000 b/d month on month and posting a decline of almost 2.5 million b/d year on year, mostly driven by China, which saw its imports declining by 3.1 million b/d.
The impact on physical crude differentials is evident. For example, ESPO physical diffs moved from Dubai +$3.50/b to + $1.80/b in the last two cycles, despite a wide EFS Brent/Dubai which would make the long-haul arbitrage less attractive and causing Dubai related grades to be more protected. The ESPO weakness is not caused by Atlantic Basin incoming barrels increasing the competition, but rather for significant drop in imports caused by Chinese destocking and demand headwinds.
Atlantic Basin spot crudes, like Nigerian, which are sold FOB and free destination, are also softer and struggling to clear because of reduced appetite from Asia. As soon the FOB trading window is past, physical cargo holders will fix ships and inevitably unsold cargoes will load and be offered on a delivered basis into Europe, which is the clearing point for Nigerian crude.
The Midland physical arb to Europe remains opened and the volumes were steady at around 1 million b/d, while Asia volumes are in decline. That’s one of the main drivers for the recent softening on Dated Brent backwardation. Additionally, we believe that Johan Sverdrup is having difficulties to arb to Asia and cargoes are ending up being offered locally which puts pressure on North Sea and Urals.
With Asia currently buying crude for runs in October-November, we believe that the peak has passed for physical crude. Stocks continue to draw in China and the rest of the world, but the physical market is not tight and refiners, because of the backwardation, are only buying hand to mouth.
Source: Platts