The crude oil market is currently engaged in the wrong debate over how much oil is actually moving via the Strait of Hormuz. It should be debating the constrained flows of refined products around Asia.
U.S. Energy Secretary Chris Wright has repeatedly claimed that much more crude is getting through the disputed strait than vessel-tracking analysts such as Kpler can see.
One of Wright’s claims was that about 15 million barrels per day (bpd) exited the Strait of Hormuz on a day last week, which if true would take volumes close to what they were before the U.S. and Israel attacked Iran on February 28.
Wright has also said transits averaged about 9 million bpd over a seven-day period, although he didn’t specify the exact dates and he has not provided details such as vessel names and their intended destinations.
Vessel monitoring services estimate that around 5 million bpd is leaving the Strait of Hormuz, and that includes so-called dark transits and ship-to-ship transfers from smaller vessels to larger tankers in the Gulf of Oman.
But the dispute over crude oil volumes is a false debate. If Wright is correct then Asia’s oil imports will start to pick up in coming weeks as the crude he claims is leaving the Middle East arrives at ports.
It’s considerably easier to track import volumes, so it’s merely a matter of time before the market can assess whether Wright is correct, or whether his numbers are overstated.
In the meantime Asia’s refined products markets remain stressed, as shown by sharply lower volumes and extremely elevated refining margins.
Asia’s imports of light and middle distillates for August are estimated by Kpler at 5.59 million bpd, in line with the 5.60 million bpd seen in July.
However, these volumes are down 21% from the 7.08 million bpd average in the three months to the end of February.
In effect, Asia is having to absorb a drop of 1.49 million bpd of key fuels such as diesel, jet fuel and gasoline.
UNEVEN FALLOUT
The impact is also not being evenly spread across the world’s top-energy consuming continent, with less wealthy countries shouldering a bigger share of the loss of product volumes.
Indonesia’s imports of light and middle distillates are estimated at 432,000 bpd in August, the lowest in 13 months and down from an average of 533,000 bpd in the three months prior to the start of the Iran conflict.
The Philippines is expected to see arrivals of 257,000 bpd of light and middle distillates in August, down from an average of 362,000 bpd in the three months to the end of February.
A wealthier country like Australia, the world’s biggest importer of diesel, is managing to secure the same levels of fuel, with August imports of light and middle distillates estimated by Kpler at 863,000 bpd, only slightly below the 880,000 bpd in the three months prior to the Iran war.
But securing fuel is coming at a high cost, with product prices remaining near record high levels and refining margins staying elevated.
The profit of making a barrel of gasoil, the building block for diesel, at a Singapore refinery was $71.29 a barrel on August 21, down from the record high of $85.63 on March 30 but also 226% higher than the $21.90 that prevailed on February 27, the day before the conflict started.
Most of the stress in refined products has been felt in middle distillates, given the constrained supply of Middle East crudes, many of which are medium in gravity. Asia’s refineries are tailored to process this type of oil into products such as diesel and jet fuel.
But even gasoline, the main light distillate, is commanding a high premium, with the profit margin ending at $20.74 a barrel on August 21, up 159% from $8.00 on February 27.
The message the market is giving is that while there may be sufficient crude oil reaching Asia, it’s not necessarily the correct grades and those countries with spare refining capacity aren’t ramping up exports to meet demand.
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The views expressed here are those of the author, a columnist for Reuters.
(Editing by Sonali Paul)