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OPEC+ should look to Asia’s uneven, uncertain crude oil recovery

As members of the OPEC+ group struggle to come up with a united view on whether to boost crude oil output or extend production cuts, they should perhaps turn their eyes to Asia, the major consuming and fastest-growing region.

The leaders of OPEC+, a grouping comprising members of the of Organization of the Petroleum Exporting Countries (OPEC), plus Russia and others, are scheduled to meet on Monday and Tuesday to hammer out whether to roll over existing production cuts of 7.7 million barrels per day (bpd), or allow output to increase from January as previously agreed.

An initial meeting on Sunday ended without consensus, with members of the group split on how long to keep the existing cuts in place, or whether a gradual increase in output should be implemented.

The current oil demand situation in Asia, which accounts for about 36% of the global total and almost 80% of expected growth in coming years, shows the nature of the dilemma facing OPEC+.

Total crude imports for November for Asia are estimated at 25.04 million bpd, according to vessel-tracking and port data compiled by Refinitiv Oil Research.

This is 11% higher than the 22.6 million bpd for October, which was the lowest month so far in 2020.

The data does suggest that Asian crude demand is starting to recover from the economic hit caused by countries locking down in efforts to contain the spread of the novel coronavirus pandemic.

But it’s worth noting that November’s estimated crude imports are still well short of the 25.67 million bpd recorded in January, the last month before the pandemic starting curbing demand, first in China and then across the rest of the region.

What may be even more concerning for OPEC+ is the breakdown of Asia’s November imports, with much of the increase being down to a rebound in China’s buying.

China is on track to import about 11.56 million bpd, according to Refinitiv, up 15% from October’s 10.06 million bpd.

The question is why is China buying more crude, especially since it’s still busy digesting the record volumes purchased during April’s brief price war between OPEC+ heavyweights Saudi Arabia and Russia, which took until last month to be fully delivered.

The answer may lie in the fact that oil prices were low during the period when November-arriving cargoes were purchased, from late September through to October.

Global benchmark Brent futures dropped to a closing three-month low of $39.27 a barrel on Oct. 2, and while they did recover somewhat, the highest close for that month was $43.34 on Oct. 8, and they dropped to close at $37.46 on Oct. 30.

Since then Brent has recovered to end at $48.18 a barrel on Nov. 27, as the market became more optimistic about a recovery in crude demand from next year on the back of successful trials of vaccines for COVID-19, the disease caused by the coronavirus.

It’s also worth noting that Saudi Arabia made some effort to regain market share in Asia, and particularly in China, by lowering its official selling prices for October-loading cargoes. It flipped the price of its flagship Arab Light grade to a discount of 50 cents a barrel to the Oman/Dubai average from a premium of 90 cents in September.

This led to higher imports of Saudi crude by China, with 2.13 million bpd expected in November, up from 1.4 million bpd in October, once again placing Saudi Arabia as the top supplier to the world’s biggest crude importer.

China’s imports from the United States also surged to a record 1.01 million bpd in November, up from 380,000 bpd in October, possibly as Beijing made belated efforts to try to fulfil the terms of the trade deal it signed with Washington in January.

Overall, it seems China largely took advantage of lower prices to purchase more crude for November. That means there is no guarantee this will continue, given prices have now risen.

The rest of Asia’s major buyers present something of a mixed picture, with India only slightly weaker in November at 3.88 million bpd, down from October’s 3.92 million bpd.

Japan is forecast to import 2.56 million bpd in November, up from 2.09 million bpd in October, while South Korea is expected to import 2.61 million bpd, steady from October’s 2.62 million bpd.

The common factor is that imports are still running well below pre-pandemic levels. While there has been some recovery in recent months, the question still remains as to whether this is enough to support a bullish narrative.
Source: Reuters (Editing by Kenneth Maxwell)

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