February 23, 2012 / 6:05 PM / 6 years ago

COLUMN-Oil rally runs into first signs of Asian resistance-Campbell

(Robert Campbell is a Reuters market analyst. The views expressed are his own.)

By Robert Campbell

NEW YORK, Feb 23 (Reuters) - Asian crude oil buyers are starting to balk at increasingly costly Brent crude oil. The sustainability of the current rally hinges on Asia recovering its for Atlantic basin crude.

The Brent-Dubai exchange of futures for swaps (EFS) quote DUB-EFS-1M, the premium holders of Asian benchmark Dubai swaps must pay over their postion to switch into Brent, is signalling a growing weariness with the recent spike in Brent prices.

The EFS premium has risen nearly $2 a barrel in the last month and is now at its highest level since November.

(Chart: http://r. reuters.com/dym76s )

One of the key supports for Brent in recent weeks has been heavy Asian buying of West African and North Sea barrels but the growing EFS premium could deter some marginal buying even as worries over the impact of the worsening impasse between the West and Iran persist.

The softening of Asian buying pressure on Brent comes as the Singapore gas oil swaps curve has fallen into a modest contango, suggesting near term diesel fuel demand is being more than adequately met by existing supplies.

(See chart: http://r. reuters.com/fym76s )

With Europe on the brink of recession and U.S. oil demand seemingly incapable of growing, the resilience of Asian consumption growth patterns is a critical factor for this year’s crude rally.

To be sure, gauging Asian oil demand is tricky and measuring it by buying patterns in the Atlantic basin market is imprecise.

Long sailing times from the Atlantic to Chinese refineries and the imperative of planning around these variables mean that Asian buyers are not as sensitive to short-term price trends than other consumers.

But given the likelihood that oil demand in the developed world will be lower than expected this year ,given the sharp increase in global oil prices, the market is increasingly dependent on Asian demand growth.


Nevertheless, the prevailing belief among oil investors is that crude cannot go down by much given long-term supply constraints, geopolitical risks and the worsening standoff with Iran.

Even if Iran is able to continue selling all of its oil, which seems to have been the blueprint of Europe’s leaders when they conceived their plan to ban imports of Iranian oil, the episode has sharply increased worries over potential future disruptions to oil exports.

But if that was the plan, it is not unfolding that way.

With a separate, and seemingly uncoordinated tightening of unilateral U.S. sanctions against Iran putting pressure on foreign banks that do business with the Islamic republic, Asian buyers are taking steps to curb their purchases of Iranian oil.

Japan, China and India, which collectively buy approximately 45 percent of Iran’s oil exports, have vowed to cut their purchases by at least 10 percent.

Indeed, Japan may cut even deeper, by as much as 20 percent, if Japanese media reports are accurate.

And increasingly, despite denials from Tehran, signs are emerging that Iran has struggled to sell all of its crude.

Reuters reported earlier on Thursday an Iranian tanker has anchored in an offshore storage location near Indonesia in a rare move.

It may be that increased Saudi Arabian crude oil supplies are meeting Asian demand, allowing the Iranian barrels to be displaced with relatively less pain than might otherwise be expected.

Of course that still cuts into OPEC’s spare capacity buffer and Saudi Arabia’s growing dependence on its own oil production for summer electricity supplies has raised expectations that Saudi oil exports are set to decline in the coming months.

But all of this begs big questions about the current rally. If Iran really is failling to sell all of its oil, and if Asian buyers really are cutting their purchases why is the Brent-Dubai EFS premium rising?

And if Asian oil demand growth remains robust, why is the Singapore distillates curve falling into contango. Is it simply a decline in demand from other regions, notably Europe, for Asian gas oil exports or is it a sign of slower Asian demand growth? (Editing by Marguerita Choy)

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