Wednesday, May 26, 2010

Economic Clout Earns Asia an Oil Discount

The rising market power of Asian oil customers is increasingly helping them buy oil more cheaply than their counterparts in the West, a reversal of the historical pattern.

Resource-scarce economies, such as China, India, Japan and South Korea, have long been heavily dependent on oil from the Middle East, giving producers there the upper hand in pricing. The surcharge, known as the "Asian premium," has averaged about $1.20 a barrel since 1988.

“It's a game changer. The balance of power in pricing is shifting to the eastern markets.

David Ernsberger, Global Director of Oil at Platts

Now, the tables are turning, handing an advantage to the region's fast-growing countries in the form of relatively less expensive energy.

In March, Saudi Arabia, the world's largest oil exporter, sold its Arab Light crude to Asia for $6.37 less per barrel than it charged European buyers, according to the Petroleum Intelligence Weekly, an energy industry trade publication. Kuwait and Iraq also followed suit. Asian buyers are probably also receiving a discount this month, PIW says, though official statistics aren't yet available.

The latest flip in prices has led many analysts to conclude that fundamental changes in the global oil trade will soon eliminate the Asian premium for good, eliminating a drag on the region's economy. In 2008, for example, Asian customers bought about 14 million barrels of oil a day from the Middle East, according to BP Statistical Review of World Energy. The premium averaged $8.08 a barrel that year, amounting to about $41 billion.

"It's a game changer," says David Ernsberger, Global Director of Oil at Platts. "The balance of power in pricing is shifting to the eastern markets."

The premium is disappearing in large part because Asians have found sources of crude beyond the Middle East, looking to African and Latin American suppliers. And, as the economies grow in importance, their bargaining power also increases.

Asia has just 2.5% of the world's proven oil reserves, Oil & Gas Journal says. About 80% of its oil is imported.

.Imports of West African crude soared 60% in the first quarter to 1.75 million barrels a day. Russia, after completing a new pipeline in Eastern Siberia in December, now sends up to 400,000 barrels of crude oil a day to refiners in China, Japan and Singapore, according to Platts, a division of the McGraw-Hill Cos.

And Asian buyers are trolling the world to find even more energy sources.

China, the region's largest consumer, agreed in recent weeks to lend Venezuela $20 billion in exchange for receiving 100,000 barrels of oil a day for the next 10 years. In March, Angola, Africa's third largest oil producer, surpassed Saudi Arabia to become China's largest supplier of crude oil.

Tsakos Energy Navigation Ltd., a major shipping firm in Greece, is sending far more tankers of oil to Asia now than it did 10 years ago, said Chief Operating Officer George Saroglou.

"It's not only China, it's also India. They are also becoming a player," he said.

Until recently, Asian customers say they have felt largely powerless in negotiations with suppliers.

"We always felt [it was] unfair, but there were no other options for us," said Chang Jihak, a crude oil trader at Hyundai Oilbank, a large refiner of South Korea.

But long-term projections for continued growth in Asia have made it an increasingly important focus for producers.

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Ding xiaochun - Imaginechina

The latest flip in prices has led many analysts to conclude that fundamental changes in the global oil trade will soon eliminate the Asian premium for good, eliminating a drag on the region's economy. Above, a launch ceremony in China for the first Chinese-made floating, production, storage and offloading vessel in 2008.
.The U.S. Department of Energy projects that, by 2030, Asia's oil demand will account for 36% of the world's total, up from 29% this year.

"Every exporter whose lifeblood is selling crude has to look at the East," said Alan Troner, president of Houston-based Asia Pacific Energy Consulting.

Middle East suppliers are striking back to protect market share. Saudi Arabia, the United Arab Emirates and Qatar are funding refineries and storage facilities in Asian countries, an attempt to lock in long-term supply relationships.

"The Middle East countries are more committed to make sure there's a market for them in Asia," said Amy Myers Jaffe, Rice University's Wallace S. Wilson Fellow in Energy Economics. In a 2004 paper, Ms. Jaffe called the Asian premium "price discrimination."

The Asian premium hasn't yet disappeared completely, and it has also swung to a discount for relatively brief periods in the past.

In April, for example, the premium may well have returned as global oil prices tumbled. The prices for Asia are set according to an average of the previous month's benchmark prices from Dubai and Oman. That likely stabilized in May, PIW estimates.

But the discounts are showing up more frequently now, and the ongoing shift in economic power towards Asia is widely seen as a sign that change will soon be permanent.

An Asian discount, said Tom Wallin, president of Petroleum Intelligence Weekly, is "looking more likely to be the new normal."

Write to Carolyn Cui at and Liam Pleven at

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