Crude sellers have ample supplies to offer into spot crude markets in Asia, with demand cooling due to heavy refinery maintenance and as a strengthening in prompt prices has deterred traders from holding oil for sale at later dates.
Crude supply has built up in Asia as refineries slow their purchases ahead of a peak in maintenance work in the late second quarter, while crude exports from Russia, Iraq and Iran have climbed ahead of output talks among major producers coming later this month.
Rising prompt values for crude benchmarks Brent LCOc1-LCOc2 and Dubai have closed the gap with prices in future months, discouraging traders from storing oil and selling it later.
This “puts a nail in the coffin for large-scale floating storage,” said analysts at RBC Capital Markets led by Helima Croft, adding that it also forces barrels back on to a market that is already oversupplied.
Oil becomes more expensive in future months in a contango market, allowing traders to roll over unsold supplies to later months to cash in on the price difference. As the price gap narrows, though, traders can be forced to offload their cargoes as quickly as possible.
“There is no lack of crude in the market,” a trader with a north Asian refiner said. His company has received offers of spot Oman, ESPO and Vietnamese grades even as most refiners have already completed their purchases for May-loading cargoes.
A drop in refining margins – or the profit made from turning a barrel of crude oil into fuel – to below $6 a barrel , the lowest in seven months, could also curb refiners’ appetite for incremental crude, traders said.
Record refinery runs in Asia in the first quarter could lead to a sharp fall in margins later this year that may prompt refiners to cut runs, Energy Aspects analyst Nevyn Nah said.
Fuel stocks have risen across the region after refinery throughput among top Asian exporters rose to an average of nearly 24 million barrels per day (bpd), up more than 1 million bpd from the same period in 2015, Nah said.
“Some combination of run cuts, unplanned outages and an increase in planned maintenance may well be needed to balance the Asian products markets later in the year,” Nah said.