Due to the growing conflict in the Middle East and the challenges associated with shipping via the Strait of Hormuz, Asian oil refiners are thinking about lowering their operating rates.
As dozens of oil-laden tankers remain stranded in the Persian Gulf, some big processors are considering 20% to 30% run reduction, according to persons familiar with these discussions.
The people, who asked not to be named because the information is confidential, stated that Chinese and Japanese refiners, especially state-owned and larger enterprises, are most likely to lower rates given their substantial reliance on crude from the Gulf.
Oil must pass through Hormuz in order to reach major Asian markets like China, India, South Korea, and Japan. These markets accept cargoes on long-term contracts from producers like Saudi Arabia, Iraq, and the United Arab Emirates. These shipments are difficult to replace from farther-off sources in the Americas, Europe, and Africa because they typically take 15 to 30 days to reach ports around Asia.
The crucial canal carries around a fifth of the world’s oil, and since the weekend, when US and Israeli attacks on Iran developed into a larger regional confrontation, ship traffic has drastically decreased. Citing missile and drone assaults against numerous vessels, the Joint Maritime Information Center, a global naval advisory group, elevated its security warning to the highest level. According to the report, maritime traffic through the conduit has decreased by around 80%.
Anthony Yuen, a commodities analyst with Citigroup Inc., stated in a video webcast that refineries are reducing runs because they are afraid they would not acquire the Middle Eastern crude they desire. Due to high freight costs, the price of alternative barrels from the Atlantic Basin will be extremely high, leading to the “odd phenomenon” of processors cutting back on operations despite strong fuel-producing earnings, he said.
Larger commercial refiners like Zhejiang Petrochemical Co. and state-owned plants like multiple Cnooc Ltd. and China Petroleum & Chemical Corp. coastal sites are particularly susceptible to the Middle East conflict. This is due to the fact that they typically refrain from purchasing sensitive crude from Iran and Russia, in contrast to the smaller independents, or teapots.
Large amounts of Iranian petroleum on tankers at sea in Asian waters are forming a temporary barrier, but Iranian oil still needs to get through Hormuz.
In order to protect themselves from potential short-term delays or supply disruptions, refineries usually maintain at least two to three weeks’ worth of crude stockpiles. Asian alternatives include regional crudes from Malaysia and Vietnam, oil from Middle Eastern producers that load outside the Persian Gulf, and supplies kept in storage in China, South Korea, and Japan.
