Middle East crude oil has been the backbone of the Asian refining sector for many decades.
Recently, regional producers have benefited from surging demand in the fast-growing economies of China and India. But in an increasingly globally interconnected market, competing suppliers from the West and Africa are constantly vying for market share.
Producers, refiners and traders use oil benchmarks to analyze the economics of arbitrage. Platts Dated Brent and Platts Dubai are some of the most widely used benchmarks in the world for determining the physical price of crude oil.
Each of them has its own characteristics, for example, the Dated Brent complex, characteristic of the light, sweet oil in the North Sea region. Platts Dubai, on the other hand, reflects the value of midsize crude, which is often preferred by buyers in Asia who set up their refineries to these specifications.
The correlation between these benchmarks is often actively traded alongside listed instruments that are used by market participants to hedge and manage the risks associated with their physical exposure.
Founded four decades ago, Platts Dubai reflects the value of widely traded and easily supplied barrels of crude oil in the region’s spot markets. It has evolved with the addition of new oil as an alternative supply to the basket to ensure that the right crude oil is available to meet the demand in the spot market.
Dubai is now a basket of crude oil, not just the original grade. Oil production itself in Dubai has dropped to about three cargoes a month, but the benchmark is about 60 times the volume due to alternative supplies.
The five grades of oil included in the Platts Dubai basket, namely Dubai, Oman, Upper Zakum and Murban in Abu Dhabi, as well as Qatari’s Al Shaheen, currently account for more than 3.5 million barrels of oil per day.
Brent / Dubai EFS
The exchange of futures for Brent / Dubai swaps or EFS is a measure of the discount of medium and high sulfur crude compared to light and low sulfur. The broader EFS makes oil prices more economical than Dubai for Asian refiners compared to Brent-linked refiners, and spread is a key determinant of flow for various grades of crude around the world.
Brent / Dubai EFS hovered around the $ 3 / bbl mark again in early April after hitting multi-month highs of more than $ 3 / bbl in late February as the recently announced easing of OPEC + production cuts from May onwards weighed sentiment. on the supply of oil to the Middle East in the coming months amid uncertainty on the demand side.
China continues to show low intentions to buy barrels for loading in June as India grapples with a second vicious wave of the COVID-19 pandemic, resulting in monthly lockdowns and limited mobility in parts of the country.
In addition, in addition to weakening supplies, higher official selling prices from Saudi Aramco, a leading producer in the region, are negatively affecting Asian buyer sentiment.
The wider spread between Brent and Dubai, meanwhile, has opened the door for Dubai-related oil grades to find use outside of their regular retail outlets. This includes a rare flow of Dubai-related cargo from the Far East, Russian ESPO mixed oil cargo to the US West Coast.
Geopolitical changes will have further implications for this spread. All eyes are now on Iran and Venezuela amid market talk that the new US administration could potentially ease sanctions on oil exports from these countries. Both Iran and Venezuela are major producers of oil, which falls into the category of varieties associated with Dubai. Thus, larger exports from both will lead to widening of the Brent / Dubai spread.
Meanwhile, expectations for higher OSPs for Middle Eastern oil from producers other than Saudi Arabia are prompting some Asian refiners to continue exploring arbitrage opportunities even in a tense economy. India was among the leaders in the collection of arbitrage cargoes, which are offered at deep discounts, while opportunities in other countries of Asia were closed due to the wide Brent / Dubai spread.
Producers in the Middle East continually monitor arbitrage spreads when installing their OSPs every month. They recognize that large unsold stocks, especially in West Africa and Europe, could reduce spot differentiation for these light sweet varieties. This could make arbitrage oil a cost-effective option for Asian buyers if premiums in the Dubai market continue to rise.