Western sanctions on Russian and Iranian oil funneled cheap fuel to Asia and in doing so eroded a decades-long trend that the continent paid more for energy than Europe, traders say , analysts and data from Refinitiv Eikon.
Analysts and government officials in consuming countries use the term Asian premium to refer to the higher prices that Asian importers paid for oil sold by major exporters, such as members of the Organization of the Petroleum Exporting Countries.
For Asia, a weakened premium equals economic stimulus, underscoring another unintended consequence of Western sanctions on oil and gas exporter Moscow, which has also led to an increase in the amount Europeans have paid for natural gas .
“It’s safe to say that some big consumers in Asia, notably India and China, are the main winners from the sanctions,” said Ole Hansen, head of commodities strategy at Saxo Bank.
Western sanctions led Russia to sell more than twice as much crude to Asia in the year to January, Kpler data shows. Iran, under US sanctions, has increased its exports to the highest in three years by some estimates, with China the biggest buyer.
Russia’s flagship export blend, the Urals, which before the invasion of Ukraine was sold in Europe at a few dollars a barrel below the dated benchmark of Brent, is sold in Asia at a discount minus $24, according to data from Refinitiv Eikon. Some industry sources, asking not to be named, say the discount is narrower at $10-$15 a barrel.
Even at a discount of around $15 a barrel, an Indian refinery processing 200,000 barrels a day would save $3 million a day on its crude purchases compared to a European competitor. On an annual basis, the saving would exceed $1 billion.
Hardeep Singh Puri, India’s oil minister, said in early February that the country would continue to buy from Russia if prices “continued to be good”.
Price takers and makers
The Asian premium dates back to when producing countries began issuing marker prices for their rough in the 1980s, and they could be higher for buyers in Asia, who were more dependent on imports, making them takers. of price.
Asian buyers have tried in the past to erode the premium, investing in refining capacity to boost their demand and improve their bargaining power.
Saudi Arabia and other major exporters reflected the current changes in significantly lower Official Selling Prices (OSPs) expressed as deviations from regional benchmarks.
In the three months to February, Saudi Arabia slashed prices of its flagship Arab Light for Asian buyers – although it raised prices for loaded crude in April and March.
However, since November, Saudi Arabia has lowered the differential of Arab Light sold in Asia by $3.35 a barrel. The differential for sales to Europe based Ras Tanura was increased over the same period by 10 cents per barrel.
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Other major OPEC exporters, Iraq and Kuwait, have also reduced their PSOs to Asia since November. Iraq, the only one of the two that also issues prices for Europe, has reduced the differentials for Basrah Medium and Heavy to Asia, and increased them to Europe.
“Iran and now Russia are increasingly competing on price and other Middle Eastern producers have to adjust their prices accordingly – the result being relatively higher selling prices to Europe,” he said. said Hansen of Saxo Bank.
Europe loses its source of supply
India is among those who complained about the Asian premium they paid to big exporters.
“Asians had fewer options than the rest of the world because their prices needed to attract long-haul exports,” said Jorge Montepeque, who for decades worked at S&P Global Platts developed the price benchmark dated Brant. “So by definition the Asians had to pay, while Europe and America had native supplies.”
Now, as Europe loses Russian crude as a source of supply, the continent must draw oil further afield and “in theory, prices in the Middle East are getting worse for Europeans,” he said. .
The outright price of Arabian light crude, by an approximation based on Refinitiv data, in Europe has approached parity and at times exceeded that of Asia in 2023.
In 2021 and early 2022, the price in Asia was mostly higher, as shown in the chart below.
‘No free market’
Neil Atkinson, an independent analyst and former senior International Energy Agency official, said Russia’s declining western shipments and its cut-price Indian sales made the Asian premium redundant.
“Those normal sorts of Asian premium or discount models don’t really apply,” he said. “The circumstances are so extraordinary. We basically don’t have the free market that we normally would have.”
In another example of firmer European crude markets, Norwegian Johan Sverdrup crude was offered on Feb. 16 at a premium to dated Brent, down from a $5.15 discount at the end of November. It is not known whether he has found a buyer.
Sverdrup, from Europe’s largest producing oilfield, debuted in the market in 2020. Initially, most shipments were destined for Asia.
After sanctions were imposed on Russia following its invasion of Ukraine that began in February last year, most of Sverdrup’s shipments remain in Europe and have replaced the Russian Urals for many refiners.
Not all see Europe paying higher prices in the longer term as other suppliers, from which Asia buys less, will fill the void – and the end of the war in Ukraine could restore the flow of Russian crude.
“Once the war is over, I think some normality will return and the sanctions will eventually be lifted, allowing Russia to compete on a level playing field for customers,” Saxo Bank’s Hansen said.