Red Sea Crisis Prompts Asia to Rethink Oil Policy, but Near-term Supplies Intact

The Red Sea crisis is prompting Asian countries to reconsider their oil policies, although immediate oil supply disruptions are not expected. Asian refiners are preparing for potential escalations by exploring alternative sources to ensure a steady supply of feedstock, which could lead to increased insurance costs and affect refining margins. Despite reliance on imported oil, Asia’s diversification of import sources and expanded storage capacities provide a buffer against supply disruptions.

Zhuwei Wang from S&P Global outlines three main concerns for Asian oil flows due to the crisis: disruption in Russian crude shipments to Asia, cautiousness among exporters for north-bound products from Asia to Europe, and potential increased bunker demand due to longer shipping routes. The crisis has led to more shippers avoiding the Red Sea and Bab al-Mandab Strait after a US-led coalition struck Houthi militants in Yemen.

In terms of impact on specific countries, China’s oil imports are minimally affected, as most of their Red Sea crude comes from Russia, which is not a prime target in the current situation. Russian oil flow to India also remains largely unaffected, with no major diversions in shipments noted.

The crisis is expected to support Asia’s bunkering demand in Q1, with rerouting through the Cape of Good Hope leading to longer voyage times and higher fuel requirements. However, Asia’s main concern lies not with the supply of Middle Eastern sour crude, but with the economic implications. Delivery costs for Persian Gulf barrels are rising, as are tanker insurance costs, which are impacting refining margins.

As a response, Asian refiners might reduce their dependence on Middle Eastern crude and look towards alternatives like African, US, and South American crude. U.S. crude is becoming more attractive, especially as the price of lighter, sweeter WTI crude nears parity with high sulfur Persian Gulf grades. This shift is driven by the comparable costs of high-quality U.S. crude to Middle Eastern grades, leading to discussions among Asian traders and analysts about diversifying their oil import sources.

Source: S&P Global