FEATURE: Negative Brent/Dubai EFS spells further pain for European, WAF crudes

London — Sharp cuts in Middle East crude official selling prices and promises of supply rises from several national oil companies pushed the Brent-Dubai Exchange of Futures for Swaps contract into negative territory for the first time Wednesday, signaling yet another blow to sentiment across North Sea, Mediterranean and West African crude markets.

At 4.30 pm Singapore time Wednesday, the May Brent-Dubai EFS was trading at minus 19 cents/b, the first time the contract had been assessed at a discount, according to S&P Global Platts data. The same instrument was trading around minus 75 cents/b at 1.10 pm London time.

With cheaper, readily available oil coming out of the Middle East, many European buyers are expected to turn there for supply, extinguishing demand for more local grades.

"If Saudi Arabia is pumping an extra 2.6 million b/d, [buyers] will be taking a lot more," a trader said, adding that subsequently there would be "less demand for non-term grades such as Urals, North Sea and West African."

Another trader said differentials across the board in Europe were going to have to react in order to compete with cheaper oil from the East.

"Everyone with unsold oil on the market got a shock from Saudi -- Iraq and ADNOC have followed suit so any sweet grade on the water will get hurt differential wise," a trader said, adding they expected Nigerian OSPs to also be reduced.

While it would often be expected that European grades would move east amid a weak ICE Brent futures market, one source said differentials would have to do a lot of work for Atlantic Basin crudes to move while others noted that many sellers would continue to look toward storage options as VLCC economics become workable.

Urals trapped, Saudi allocations awaited

Arbitrage movements eastwards of Urals crude and Mediterranean-loading grades are expected to become even more problematic in the coming weeks. It had appeared last week that Chinese demand might be recovering, with Unipec buying a couple of Urals cargoes as the world's largest oil importer took the medium sour grade for the first time since the COVID-19 outbreak.

However, with Saudi Aramco having reduced April prices for Asia by between $4/b and $6/b for all grades, the Russian grade will struggle to generate interest in that market.

"I'm not surprised to see no bids for Urals before the market has the Saudi allocations," said one trader. At the same time there have been outstanding Urals offers in the Platts Market on Close assessment process for the last two sessions since the Saudi OSPs came out at the weekend.

The trader was referring to the allocation process, whereby Aramco's partners wait to see their monthly entitlement before deciding whether they wish to exercise the full option. Given the competitive prices for April volumes, traders are expecting buyers to take most of the Saudi oil available -- and that total may, in theory, be up by more than 1 million b/d from March -- reducing the residual demand for other grades, such as Urals.

"Iraq OSPs were also quite competitive, Basrah Light is going to be among the most preferred grades," he added. "Demand for spot barrels [such as Urals and CPC Blend] will collapse."

Another Persian Gulf producer preparing to step up production is Abu Dhabi National Oil Co, the UAE's biggest producer, which is accelerating plans to boost capacity to 5 million b/d, its chief executive said Wednesday.

"We are in a position to supply the market with over 4 million b/d in April," said CEO Sultan al-Jaber. "In addition, we will accelerate our planned 5 million b/d capacity target."

WAF competes with sours

In the West African market, traders have said that despite the negative Brent-Dubai spread, a reduced flow east could be expected due to the competition with high volumes of the cheap Middle Eastern barrels.

"Saudi is the cheapest barrel on Earth at the moment and WAF has to discount to compete with sour barrels...all of Asia is demanding sour [crude]," a trader said.

Crudes from Angola and Republic of Congo see a large proportion of their demand from Asian buyers, and increased pressure had come from the collapse in heavy crude prices and in Russian ESPO, a competitive grade, sources said.

"[Russian ESPO] lands July ICE at plus 30 cents offered...I can't see how much in WAF can compete without some steeper discounts," another trader said.