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Top oil buyers rue global chaos bringing back seller's market

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US President Donald Trump's sanctions on Iran and Venezuela, the Opec+ coalition's output curbs, and disruptions from Nigeria to Libya are all handing crude sellers the upper hand in negotiations.

[SINGAPORE] The world's biggest oil buyers are being forced to go on the defensive once again.

US President Donald Trump's sanctions on Iran and Venezuela, the Opec+ coalition's output curbs, and disruptions from Nigeria to Libya are all handing crude sellers the upper hand in negotiations. With refiners in Asia left competing with each other for limited global quantities on offer, they are being forced to pay more for their favored oil varieties.

That's a shift from just a few months ago, when sellers were kept on their toes as they tried to tackle a flood of US shipments coming east. The change is being reflected in prices for Abu Dhabi's Murban crude, with cargoes loading in June sold at 25 to 45 US cents a barrel above the grade's official selling price. By contrast, the oil fetched discounts during the previous six months as it was weighed down by a glut of comparable supply.

"The strength in the physical market indicates an extremely tight market," said Virendra Chauhan, a Singapore-based analyst at industry consultant Energy Aspects, adding that the crunch is likely to last through the third quarter. "With Opec keen to avoid last year's mistakes where they pre-emptively raised supply, buyers will need to pay up before producers raise output."

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It wasn't so over the past several months, when buyers in Asia benefited from a bigger pool of crude selections as American grades increasingly made their way into the region. That added ample supplies that's pushed spot prices down in the physical market. However, Trump's decision to end sanctions waivers for Iranian oil buyers and the de-facto ban on Venezuelan supply have turned the tide in the market.

SUPPLY SQUEEZE

While Opec and its allies are pumping less to avert a glut, contamination of Russian Urals oil - of a similar quality to some Iranian blends - is adding to a shortage as European processors halted shipments of the grade. The region is scrambling for alternative supply, raising the possibility of a tighter market this month, according to traders in Asia.

"If there is a serious supply drop in the market, and it's not compensated by US crude or Saudi Arabian crude, and Russia doesn't fill the gap, then you will have some price issue," said R. Ramachandran, director of refineries at India's state-run Bharat Petroleum Corp.

In addition to Abu Dhabi's Murban, higher costs are also being signaled in other corners of the physical market. Oman crude futures surged to US$2.65 a barrel over Middle Eastern benchmark Dubai swaps on Friday, compared to a premium just 51 cents in early March when refiners were coping with lower demand and weaker margins.

RISING DEMAND

Supply isn't the only issue that's pointing to a pricier physical market. Demand is also forecast to be higher in the final two quarters of this year following the refinery maintenance season in Asia that typically peaks by the first half, according to industry consultant IHS Markit Ltd.

Refinery operating rates will be higher due to the ramp-up of new plants including Hengli Petrochemical's refinery in China, on top of summer seasonal demand in the third quarter, according to Victor Shum, vice-president of energy consulting at IHS. The new maritime rule that require ships from Jan 1 to use cleaner supply will boost plant runs in the final three months, he said.

"Asian refiners will step up crude diversification, albeit with cost implications, as Iranian sanction waivers end amid rising demand," Mr Shum said. "Heightened competition for crude supply will continue in the coming months."

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