The Asian oil premium? Almost gone, no coming back

SINGAPORE Thu Apr 23, 2009 5:12am EDT

SINGAPORE (Reuters) - For decades, Middle East oil producers have had their Asian customers over a barrel: With few alternatives to Gulf crude and little bargaining power, they paid up to $6 more for their oil than U.S. or European refiners.

But the rapid expansion of Chinese and Indian demand, growing Gulf investment in Asian refineries and a concerted effort to wield more pricing clout have gradually ground down the so-called "Asian premium," long a topic of consumer nation angst.

Now, with Asia expected to lead the world out of recession, and new non-OPEC crude supplies heading into the region from Kazakhstan, Brazil and Sudan, the balance of oil pricing power will shift even further East. That may not eliminate the premium altogether, but analysts say it is unlikely to expand again soon.

"Will the Middle East countries continue to have the lion's share (of exports) in the region? Yes," said Al Troner, managing director of Asia Pacific Energy Consulting.

"But as additional pressure is applied by new pipelines (to China) and additional volumes from South America, they will have to choose between defending their market share or defending the price of their crude," he added.

Rarely officially discussed or acknowledged, the Asian oil premium has dwindled to an average of less than $1 per barrel over the past two years.

The premium briefly reverted into a discount during the last quarter of 2008, as Middle East benchmarks retreated more rapidly than U.S. WTI and Europe's Brent, before tightening OPEC supplies brought support to Gulf crude again in Asia.

The premium is determined in large part by the official selling prices (OSPs) set by Saudi Arabia, Iran, Iraq, and Kuwait, which supply about 15 percent of the world's crude among them. They set differential prices against benchmarks on a monthly basis, adjusting them to account for regional variations.

From an average of between $1.00 and $1.50 earlier this decade, the premium has dropped to below $1.00 over the past two years.

Reuters data calculate the daily price of Arab Light crude heading to Asia some 84 cents a barrel above the price of the same grade heading to the U.S. Gulf., and some 22 cents more expensive than crude heading to Europe over the past two years.

For daily calculations of the price of Saudi grades to different destinations, click

For a graph of the difference between FOB prices of Saudi Arab Light to Asia and US, click:

here

For a graph of the difference between fob prices of Saudi Arab Light to Asia and Europe, click

here

That is a welcome change for Asian consumers who on Sunday will meet in Tokyo with their counterparts from major Middle East oil producers, who are more dependent than ever on the continued growth of Asian economies to support future demand for their oil.

LEADING THE WAY

Asia, which relies on the Middle East for over half its crude oil imports, drove the surge in prices between 2004 and 2008 as demand roared in powerhouses China and India.

Once the global economy recovers, the scenario may repeat itself, even as greater efficiency and conservation take hold in the West -- saturated markets where governments are still pushing forward green initiatives, tempering demand growth.

"Clearly, China is a strategic market for Gulf producers. Regardless of any premium, they want to be present in these (Asian) markets. And they know that when demand comes back, the OECD will not be offering an expanding market," said Bill Farren-Price, energy analyst at Medley Global Advisors.

All told, Asia is still small compared to the gargantuan U.S. market, which consumes one in every four barrels of the world's oil. Asia overall uses about one-third of global crude.

But fundamentals are revealing: While U.S. crude oil stocks continue to rise to two-decade highs, Chinese fuel stocks fell 15 percent in March as demand picked up.

Few traders or analysts expect the Gulf producers to adopt uniform pricing to all destinations, a move that would limit their ability to subtly adjust the volume of oil it sells to different regions -- and a measure that would probably prevent them from maximizing profits by smoothing out anomalies.

But with Beijing having made plain its goal of exerting more influence over raw materials prices -- becoming a price-maker instead of a price-taker -- long gone are the days when Asia would pay several dollars more than its Western counterparts.

"The Japanese were willing to pay the premium to secure supplies," says Troner. "Will China and India accept it? I very much doubt it."

(Additional reporting by Angela Moon in Seoul; Editing by Jonathan Leff and Ramthan Hussain)

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