Asia looks to diversify after attacks on Saudi oil production

Saudi Arabia’s biggest customers in Asia are considering diversifying their supplies of oil and preparing to refine heavier grades of crude following attacks that knocked out half of the kingdom’s production causing an oil price spike.

Most of Saudi Arabia’s exports go to Asian countries and the region has limited oil supplies of its own, raising fears that had higher oil prices maintained that it would lead to higher inflation and current account deficits at a moment when growth has already slowed because of trade friction between the US and China.

Japan, China, South Korea and India are all among the top five destinations for Saudi Arabian oil.

“We are of course paying close attention to any effect on stable oil supplies,” said Yoshihide Suga, Japan’s chief cabinet secretary. With memories of the 1970s oil shocks running deep, Japan has a national reserve equivalent to more than 230 days of supply.

Ministers said they would release oil from the reserves if necessary but such action was not needed yet. “At present, the market is able to supply enough from its abundant stocks,” said Mr Suga.

China and India do not hold such large stocks, making them more reliant on Saudi Arabia’s own reserves, as well as other possible sources of supply.

“As of now there is no major shortage because India has its own reserves,” said Sumit Pokharna, an oil and gas analyst at Kotak Securities, noting that India has about 12 days of crude oil available. “But if the delay happens for two weeks there will be a problem.”

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Gao Jian, an oil analyst at Zhaojin Futures, said that Saudi Arabia had reserves to guarantee short-term supply but that China might look to other channels if any disruption turned out to be long-term. Both China and India have refineries that can handle unprocessed crude oil if Saudi Arabia needs to export that instead.

As a global energy trading hub and the world’s third-largest oil refining centre, Singapore — which imports 150,000 barrels of Arab Light crude oil per day — could be heavily affected if a spike in oil prices was sustained, according to Vima Jayabalan, head of short-term oil research at Wood Mackenzie. She added it could lead to a cut in its exports of refined oil products and price hikes for the rest of the region.

Even if Asian countries can weather the disruption, the Saudi supply shock was a reminder of their uncomfortable dependence on the Middle East, prompting renewed debate about increasing stockpiles and diversifying supply.

“The key is to gradually get rid of heavy reliance on Middle Eastern oil. There is a consistent risk to oil supply from Middle East countries. China has been diversifying its oil suppliers,” said Zhu Guangming, an analyst from the consultancy Sublime China Information.

Among developed nations, Australia is one of the most vulnerable to any prolonged disruptions to oil supply, even though it exports huge volumes of coal and gas to Asia. It has the smallest oil reserves of any International Energy Agency member with just 58 days of net fuel imports: a level below a minimum commitment of 90 days made to the agency. 

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Rick Perry, US energy secretary, recently disclosed that Canberra was negotiating with Washington over a proposal to buy and store crude oil within the US Strategic Petroleum Reserve, which is held at multiple sites along the coast of the Gulf of Mexico.

Reporting by Robin Harding in Tokyo, Stephanie Findlay in New Delhi, Jamie Smyth in Sydney, Christian Shepherd and Xinning Liu in Beijing, Stefania Palma in Singapore and John Reed in Bangkok

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