Asian refiners stand to gain from the disruption of Russian oil supply, with rising price gaps among global crude oils creating an opportunity to export products at premium prices to Europe, analysts said.
With crude rising to its highest prices since 2008, Asia’s oil refiners will face higher input costs to make products like diesel and gasoline. But a widening gap between Brent and Dubai crude prices “bodes ill for EU refiners, but…could enhance competitiveness of Asian peers,” Citigroup said in a research note.
Brent typically trades at a premium to Dubai because of quality differences, but recently the difference has been wider and more volatile than normal. Dubai crude, the Middle Eastern benchmark that influences much of the oil imported by Asian refiners, was below $120 a barrel Wednesday, while the Brent benchmark surged past $130, according to data from ICE. The Brent-Dubai differential averaged near an atypically high $5 in February and hit at least $17 at one point last week, a Singapore-based energy trader said.
Traders attribute the widening differential to the unwillingness of companies to buy Urals crude, a grade of oil produced in Russia that—until recently—formed a significant portion of European oil imports. The supply shortfall is leading European importers to buy more of oil of grades that influence Brent, pushing the price of Brent higher.
“No one wants to touch Russian crude these days,” the Singapore-based trader said. “And even if there are buyers who are willing to take on a cargo, it’s unclear whether they would be able to get the necessary credit lines for it.”
“The spread has widened,” a Singapore-based trading analyst added. “There’s limited offers.”
Equity research company Morningstar added that even if European refiners can reorganize trade to bring in crude from elsewhere, the oil will likely be inferior to Russian crude for purposes of making diesel, a key fuel used for transport in Europe. That would force refiners to buy higher volumes to produce the same amount of diesel, something that would raise overall oil consumption and hence costs.
A reorganized trade flow would “impact the refinery setup, and the potential petroleum product yield,” Morningstar said.
Asian refiners, for their part, don’t have the same supply interruption given that they tend to source inputs from Middle East companies. That would put them in position to take advantage of the arbitrage arising out of the relative tightness of the European market, Citi said.
Citi noted that the Singapore gasoil spread with the corresponding European futures recently fell to a record low of -$167 a ton, compared with the 2021 average of -$19 a ton.
Analysts are broadly positive on Asian refiners. In a FactSet poll, 15 of 20 analysts have buy ratings on S-Oil Corp. with an average target price of KRW125,850, 43% above its Thursday closing price of KRW88,200. SK Innovation Co. is rated buy by 21 of 25 analysts with an average target price of KRW320,280, 58% higher than its last-traded price of KRW203,000.
In Southeast Asia, Thai Oil PCL has buy ratings from 11 of 19 analysts, with an average target price of THB62.24. Its stock was last at THB53.50.