Refiners Hold Off Buying Oil as Prices Surge

Refiners are beginning to balk at eye-watering premiums on available oil barrels, threatening to slow down the flow of the world’s most traded commodity as the war in the Middle East upends energy markets.

Markups of as much as $40 a barrel above benchmarks in the Middle East, $13 in Brazil and $10 in Azerbaijan — on top of sky-high freight rates — are leading refineries to hold off purchases at a time when many are cutting crude processing and fuel prices are surging. The soaring premiums and hesitation to close deals were related by several traders with direct knowledge of supply talks. 

The holdup is just the latest sign that traders and refineries around the world are increasingly scrambling to adjust to the upheaval in a region that accounts for a fifth of global crude supplies. This could further exacerbate the shortages of fuel that are showing up in some markets around the world.

Although there’s still ample time left for trades to wrap up this month’s trading cycle, the challenges to replace whatever lost volumes that they can manage are significant. Among the complications are tweaks to a key pricing mechanism for Middle East crude and distortions in the forward price structure that have muddled valuations. 

Supply from the Persian Gulf is all but blocked off from global markets as Iran has effectively closed the Strait of Hormuz. Saudi Arabia can ship some of its crude from its Red Sea coast, while Oman and the United Arab Emirates have ports on the other side of the strait, but the capacity to export from those points is much more limited. Citigroup Inc. estimates that about 15% of global supply is caught up in the blockage.

On Wednesday, the International Energy Agency agreed to discharge 400 million barrels from emergency oil reserves, its largest-ever release, as governments seek to contain a price spike driven by the Middle East war. The split between crude and refined fuels wasn’t immediately clear, muddying the potential impact on prices. 

In recent deals, Saudi crude for prompt-arrival was sold at a $30 to $40 premium to official selling prices, while Omani crude for April loading was sold at a roughly $20 premium to the Dubai benchmark, traders said. That compares with just a few dollars before the war.

Brazilian crude was offered at $12 to $13 above Dated Brent for delivery to China, up by about $9 from two weeks ago. Azeri Light, a favorite grade among Mediterranean refineries, was offered at $7 to $10 above Dated Brent, up from $3 to $4 two weeks prior, but only a few deals were done, traders said.

A standstill is also evident in the West African crude market, where barrels aren’t selling strongly even as output gets increasingly choked off elsewhere. The majority of West African crude cargoes for April loading are still hunting for buyers as high freight rates make the region’s crude unattractive for the long haul to Asia, traders said.

Asia’s two biggest buyers of West African supply, India and China, are “busy either cutting back runs, upping Russian imports, drawing on floating barrels and looking to draw on their own strategic petroleum reserve,” said Neil Crosby, head of research at Sparta Commodities. 

Technical limitations to how much some Asian refiners can change their feedstock are also a factor in the West-to-East trading lull, Crosby said.

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