Cheapest OPEC Crude Since ’09 Still Too Costly for India

OPEC must keep reducing prices to undercut competing supplies from Latin America and West Africa, Indian refiners said.

Saudi Arabia, Iran and Iraq, which account for about half the output from the Organization of Petroleum Exporting Countries, will sell crude to Asia next month at the biggest discounts since at least January 2009. Hindustan Petroleum Corp. and Mangalore Refinery & Petrochemicals Ltd. say that’s still not enough to stop them looking for alternatives.

The highest U.S. production in almost 30 years is reducing America’s demand for oil and giving consumers in Asia a greater choice of suppliers, from Venezuela to Alaska and Nigeria. The glut has driven futures into a bear market and prompted OPEC members to cut prices to defend their market share.

“Obviously the Middle East producers want to retain market leadership in Asia,” said B.K. Namdeo, the refineries director at Hindustan Petroleum, India’s third-largest state refiner. “Availability is one thing, but the customers must get the price advantage as well.”

The U.S. imported 7.62 million barrels a day of crude in July, down 29 percent from the peak in June 2005, data from the Energy Information Administration show. European consumption is also shrinking as refineries are shutting or converting to storage depots at the fastest pace since the 1980s after demand for oil products dropped.

Crude that may have previously found a buyer in the U.S. or Europe is now available for Asia and competing with traditional suppliers from the Middle East, according to the Paris-based International Energy Agency. Asia will account for more than half of global demand growth this year.

Alternative Supplies

South Korea is taking the first Alaskan export cargo since 2004 while Japanese traders are purchasing U.S. shipments of ultra-light oil from the Gulf of Mexico. India’s Reliance Industries Ltd. booked its second 1.2 million-barrel cargo of Carabobo crude from Venezuela this year.

Saudi Arabia reduced the November official selling price, or OSP, for its Arab Light grade to Asia by $1 a barrel to a discount of $1.05 to the average of Oman and Dubai crude, the lowest level since December 2008. Iran and Iraq followed with similar cuts in the following days.

“Middle East producers have to respond with price cuts, or else they lose the market share,” said Vijay G. Joshi, the refinery director at Mangalore Refinery & Petrochemicals. “We have term contracts with Middle East suppliers, and that would continue. But we’re increasingly looking at Latin American and West African crudes.”

Brent-Dubai

The cuts might not be enough to lure Asian customers because the slump in Brent crude, the benchmark grade for supplies from West Africa to the North Sea and Mediterranean, is keeping alternatives competitive, according to Lalit Kumar Gupta, the managing director and chief executive officer of Essar Oil Ltd. Brent futures have collapsed 25 percent this year and traded as low as $83.02 a barrel in London yesterday. It’s at $83.35 today.

“Brent has gone down, so Brent-related crudes are getting cheaper,” Gupta said in an interview from Mumbai. “The comparative advantage of other crudes remains.”

Brent’s premium to Dubai oil, the Middle East benchmark crude, averaged $1.40 a barrel this quarter, the least since the three months through June 2010, according to data from PVM Oil Associates Ltd. It was as high as $4.87 in the second quarter of this year.

China, the world’s biggest oil consumer after the U.S., is also diversifying its suppliers. Growth in Latin American imports to China outpaced the expansion of purchases from the Middle East in the first eight months of the year, data from the country’s customs bureau show. China bought 8.7 percent more Middle Eastern crude this year than in 2013, compared with a 20 percent increase in oil from South America.

China Contracts

Saudi Arabia’s share of China’s crude imports narrowed to less than 16 percent in the first eight months of this year, from 19 percent last year.

An official from China Petroleum & Chemical Corp.’s Jinling refinery, who asked not to be identified because of internal policy, said the Saudi price cuts wouldn’t have any immediate effect on the crude types Chinese refiners purchase because they import on the basis of long-term contracts.

While price reductions may make Middle East crude “theoretically competitive” for refiners in Japan, the world’s third-largest oil user is unlikely to boost shipments because of low refinery utilization rates and weak demand, according to Shohei Setoh, a manager at Japan Biofuels Supply LLP, a joint venture between Japanese refiners, and former crude trader.

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