CRUDE MOC: Prompt cargo overhang pulls Middle East prices sharply lower

Singapore — Price differentials for Middle East sour crude grades, and backwardation for the Dubai market structure declined sharply on the second trading day in February, as Chinese traders appeared to be reselling prompt cargoes due to falling demand in the country.

The April Dubai cash/futures spread narrowed to be assessed at 52 cents/b Tuesday at the end of the Platts Market on Close assessment process at 4:30 pm in Singapore (0830 GMT). The spread began the month at 88 cents/b (assessed at Monday's close) is already down significantly from January's average of $2.11/b.

Crude traders told S&P Global Platts Tuesday that refineries in China were cutting runs as a result of falling product margins, such as those for naphtha, gasoline and middle distillates. Additionally, traders reported seeing prompt February- and March-loading cargoes being resold in China, which is likely to add pressure to Middle East crude prices in the ongoing April spot market.

Traders had initially anticipated weaker oil demand in Q1 2020 due to seasonal maintenance across Asia, with spot prices for Middle East crude grades falling into discounts earlier this year.

The weak demand situation was aggravated by the coronavirus spread, with S&P Global Platts Analytics estimating anywhere between 900,000 b/d to 2 million b/d of global oil demand decline in February. Much of this is likely to be concentrated in China, with Middle East sour crude barrels facing a high degree of exposure to the decline in demand. China is one of the top importers of Saudi and other Middle East grades in Asia.

In the Platts Market on Close assessment for Middle East sour crude on Tuesday, two partials of Dubai changed hands at an outright price of $53.96/b each. This brings the total partials count for the first two trading days of February to seven.

Under the partials trading mechanism, the seller declares a full 500,000-barrel cargo to the buyer after 20 partials have been traded for the same loading month between the two companies.

For Dubai partials, the seller has the option to deliver a Dubai, Oman, Upper Zakum, Al-Shaheen or, with a quality premium, Murban cargo to the buyer.