Crude from the Atlantic basin has become more attractive to Asian buyers after a closely-watched spread narrowed sharply, opening up an opportunity for bigger flows east.
The premium of Brent futures to Dubai crude swaps, also known as Brent-Dubai exchange of futures for swaps, or EFS, dropped to almost zero on Wednesday. That’s down from a peak of about US$4 ($5.13) a barrel in June, according to PVM Oil Associates data.
The gauge effectively shows the price difference between European and Middle East crude. It matters because a narrower EFS means that grades priced against Brent — including from the North Sea, Mediterranean and West Africa — become more appealing to refineries in Asia.
Brent spreads have weakened amid a seasonal lull in European crude buying, as well as bigger US oil exports and growing supply elsewhere in the region. The excess supply “has found at least a temporary way to clear into Asia” given that the arbitrage window creates the potential for higher flows east, Sparta Commodities said in a note.
The strength in Dubai came despite the Organization of Petroleum Exporting Countries (OPEC+) and its allies over the weekend agreeing to start reviving another layer of halted production a year ahead of schedule. And Saudi Arabia announced a bigger-than-expected cut for most of its official crude prices, which should in theory weaken the Middle East benchmark.
Yet benchmark oil prices have hardly moved since the OPEC+ decision. The muted reaction is probably because traders see the scheduled hike of 137,000 barrels a day for October as marginal and believe the actual amount — and especially the remaining 1.5 million barrels a day — may not materialise.
See also: OPEC still sees tight oil market despite supply increases
There has also been much discussion during this week’s big gathering of oil executives and traders in Singapore over the strength and duration of China’s purchases for its strategic petroleum reserves, though it’s hard to determine the scale or the pace of buying.
At the same time, Dubai prices have been supported partly by increased purchases from India after the country reduced imports of Russian crude under pressure from Washington. Plus some traders are building their long positions of derivatives contracts known as Dubai partials in a pricing window run by Platts, a unit of S&P Global Commodity Insights, according to people monitoring the window — and that has also strengthened the Middle East benchmark.
On the other hand, Brent has been weighed down by oversupply. The Platts North Sea pricing window — which is used to assess the Dated Brent benchmark — has been dominated by offers to sell recently. Several cargoes for late September loading are struggling to find buyers.
Asian refiners have yet to buy much North Sea crude or Kazakhstan CPC Blend lately, but West African supply has traded eastward after several tenders. Indian Oil Corp, Hindustan Petroleum Corp and Indonesia’s Pertamina purchased at least five cargoes of West African crude between them since the start of the month, according to traders familiar with the deals.
