Brent/Dubai spread an indicator to watch amid shifting crude oil flows

Middle East crude oil has been a mainstay of the Asian refining sector for many decades.

More recently, regional producers have benefited from the demand surge in the fast-growing economies of China and India. But in a market that is increasingly globally interlinked, competing supplies from the West and Africa constantly vie for market share.

Producers, refiners and traders use oil benchmarks to analyze arbitrage economics. Platts Dated Brent and Platts Dubai are among the most widely used benchmarks around the world for physical crude oil prices.

Each has its own characteristics, with the Dated Brent complex typified by light, sweet crudes in the North Sea region. On the other hand, Platts Dubai reflects the value of medium sour crudes that are often favored by buyers in Asia, who configure their refinery operations to meet these specifications.

The correlation between these benchmarks is often actively traded, alongside exchange-listed instruments that are used by market participants to hedge and manage risk of their physical exposure.

Established four decades ago, Platts Dubai reflects the value of widely tradeable, readily deliverable barrels of crude in the region's spot markets. It has evolved with the addition of new crudes as alternative delivery into the basket, to ensure there is suitable availability of crudes to meet spot market demand.

Dubai now represents a basket of crudes, rather than just the original single grade. Production of Dubai crude itself has fallen to around three cargoes a month, but the benchmark represents around 60 times that volume through alternative delivery.

The five crude grades included in the Platts Dubai basket, namely Dubai, Oman, Abu Dhabi's Upper Zakum and Murban as well as Qatar's Al Shaheen, now represent over 3.5 million b/d of crude production.

Brent/Dubai EFS

The Brent/Dubai exchange of futures for swaps contract or EFS is a measure of medium, high sulfur crudes' discount to light, low sulfur ones. A wider EFS makes crude priced against Dubai more economic for Asian refiners compared to Brent-linked ones and the spread is a key determinant of flow for various grades of oil around the world.

The Brent/Dubai EFS once again hovered around the $3/b mark early April, after hitting multi-month highs of over $3/b at the end of February, as the recently announced easing of the OPEC+ production cuts from May onwards weighed on sentiment for Middle East crude supply in the coming months amid uncertainty on the demand side.

China continues to display stunted buying intent for June-loading barrels while India deals with a vicious second wave of the COVID-19 pandemic, leading to month-long lockdowns and mobility curbs in parts of the country.

Additionally, adding to the easing of supplies, a hike in official selling prices by Saudi Aramco, the region's leading producer, is weighing on sentiment for Asian buyers.

The wider spread between Brent and Dubai, meanwhile, has opened opportunities for Dubai-linked crude grades to find a home outside of their usual outlets. This includes the rare flow of Dubai-linked cargoes of Far East Russian cargoes of ESPO blend crude to the US West Coast.

Looking ahead

Geopolitical changes will have further ramifications 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 large producers of oil that falls in the category of grades linked to Dubai. Larger exports from both would therefore push the Brent/Dubai spread wider.

Meanwhile, expectations for higher OSPs for Middle East crude from Middle East producers other than Saudi Arabia are prompting some Asian refiners to continue to explore arbitrage opportunities even when economics are stretched. India has been among the front-runners in picking up arbitrage cargoes that are being offered at deep discounts while opportunities elsewhere in Asia have been shut due to a wide Brent/Dubai spread.

Middle East producers constantly monitor arbitrage spreads in setting their OSPs each month. They are aware that large unsold stocks, especially in West Africa and Europe, could drive down spot differentials for these light sweet grades. This could make arbitrage crude an economical option for Asian buyers if premiums in the Dubai market continue to strengthen.