Another red flag for 2025 oil balance: Asian refiners mull cutting term crude volumes

Negotiations between Asian refiners and Middle Eastern oil producers over 2025 term supplies are reaching a boiling point, with just a month left to finalize deals. Market chatter indicates refiners are pushing for steep cuts to next year’s liftings. While this could be a strategic play by buyers aiming for better terms, it also reflects expectations of a supply glut in 2025 and the potential for a price war among producers.

Some Chinese refiners are allegedly considering cuts of up to 20% in their Saudi term crude volumes for next year, while other Asian refiners may have opted not to renew term contracts with Qatar Energy for Al Shaheen crude, according to a report from Energy Intelligence. While the specifics of the negotiations remain unclear, several market insiders told Kpler that “the news didn’t come out of nowhere.” Asian refiners, particularly Chinese ones, have already been scaling back on Saudi crude purchases this year due to weak product demand and slim refining margins.

Arab Light crude OSPs, $/bbl; Saudi crude exports to China, Mbbls

Source: Saudi Aramco, Kpler

China’s imports of Saudi crude are poised to average 1.33 Mbd in the first 10 months, marking a 12% drop from the same period in 2023 and the lowest level in six years. Saudi oil's share in China’s total seaborne crude intake (including shipments unloaded at Myanmar’s Made Island) has slipped to around 13% this year, down from 15% in 2023 and 18% in 2022. This shift aligns with China ramping up purchases of heavily discounted Russian and Iranian crude.

Chinese refiners frequently cite high pricing as the primary reason for cutting back on their Saudi crude nominations. Saudi’s flagship Arab Light can be roughly $1.5/bbl more expensive than its rivals such as UAE’s Upper Zakum and Qatar’s Al Shaheen even at its recent lows—let alone the hefty $5-6/bbl premium over Russia’s medium-sour Urals.

Arab Light differentials against selected grades on FOB basis, $/bbl

Source: Kpler calculation based on Argus data

The intent to reduce term volumes with Middle Eastern producers also reflects market expectations of ample supply in 2025, as OPEC+ members plan to begin unwinding a 2.2 Mbd voluntary cut in one month time. Even if the group chooses to postpone the production increase at its December meeting, rising output from non-OPEC+ countries is still projected to cover next year’s demand growth. Some might hope to decipher Middle Eastern supply trends from the 2025 term deals, but that’s no easy feat, with the 10% operational tolerance clause (5% for some producers) still in play. This flexibility allows producers like Saudi Arabia to bump up or scale down their assumed exports of 6 Mbd by 10%—all without touching the core terms of the contracts. In our view, OPEC+ is more likely to maintain cuts through the first half of 2025.

What could tip the scales in favour of Middle Eastern producers, however, is a potential Trump presidency stocked with hardline anti-Iran advisors. The former U.S. president withdrew from the Iran nuclear deal in 2018 and imposed tough sanctions, slashing Tehran’s crude exports by two-thirds the following year. Should Trump move to curb Iranian crude flows again, Middle Eastern producers could finally ramp up output without the risk of crashing oil prices. But before that happens—or perhaps never does—Middle Eastern producers need to gear up with competitive pricing and terms to win over Asian refiners. A good place to start might be with a generous cut to their OSPs next week.

Dubai M1-M3 spread, $/bbl

Source: Argus Media

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