Kuwait's Crude Oil Export Cuts Squeeze Asian Refiners' Profit Margins, Creating Supply Crunch

After Saudi Arabia and Russia, Kuwait followed the OPEC+ decision to curb Crude Oil exports which are squeezing the profit margins of Asian refiners. As Kuwait taps the brakes on exports, the Asian refiners face higher-than-expected values of Crude Oil exports. As a ripple effect, Asian refiners scramble for other alternatives to sustain their offtakes.

After witnessing Kuwait's Crude Oil cuts, followed by the other OPEC+ countries, the value of Crude Oil settled at 82.92 WTI USD/barrel along with 86.31 Brent USD/tonne during the second week of August 2023. Kuwait's Crude Oil export cuts create a supply crunch for Asian refiners as it has created problems for Asian refiners, who have invested heavily in new plants designed to process sour Crude Oil. These refiners are now facing higher costs and lower profit margins as they must find other alternative sources of Crude Oil to sustain their profit margins. Some refiners have been able to find discounted Crude Oil from Russia, but not for the long term, while most refiners will have to pay up for similar quality Crude Oil from other suppliers including Saudi Arabia, Iraq, and the United Arab Emirates. In addition, the supply crunch could lead to disruptions in the supplies of Crude Oil derivatives, including gasoline and diesel. This could have a negative impact on economic activity in the Asian region.

The impact of the supply crunch is likely to be felt most acutely by Chinese refiners, as they are the most reliant on Kuwaiti crude. The further cut could also lead to higher prices for other commodities, such as plastics and fertilizers, which are made from oil. However, the International Energy Agency has warned that the supply disruption might have a destabilizing effect on the global Crude Oil market. The producers are worried about the new refining capacity coming online in China due to supply reductions. As per the market sources, the country is adding over 1 million barrels per day of new refining capacity in the upcoming months, which will further increase demand for Crude Oil in China. However, some of the market players have anticipated that Formosa could replace Kuwaiti exports in the near term.

As per ChemAnalyst, the soaring Crude Oil prices have a negative impact on every commodity which could imbalance the foundation of economic growth. However, the table might turn out if the Asian countries, including China, draw inventories and holds the demand for Crude Oil for a few weeks.