Sour crude complex dips on renewed worries over supply surplus

Singapore — Benchmark Dubai crude futures declined mid-morning Wednesday, the first trading day for the month of April when the OPEC's production cut agreement ends, resulting in Saudi Arabia and other Middle East producers pumping at maximum capacity.

At 11 am Singapore time (0300 GMT), the new front-month June Dubai futures contract slid by 90 cents/b to be pegged at $31.09/b. The contract was assessed at $31.99/b at 4:30 pm in Singapore Tuesday.

De-facto OPEC leader Saudi Arabia said last month its state oil giant Aramco will raise crude production to its maximum 12 million b/d capacity once its OPEC quota of 10.14 million b/d expires at the end of March.

The statement came as global oil demand spiralled downward in the month of March, and is set for further correction amid a decline in global economic activity in the wake of the coronavirus-led lockdowns.

Global oil demand will drop by 26 million b/d, or 25%, in the week of March 30-April 5, as social-distancing measures to contain the coronavirus now impacts 92% of global GDP, Goldman Sachs said in a note Monday.

Demand destruction saw oil prices lose more than 30% in value over March, and intermonth spreads for Dubai crude futures plunged into heavy contango.

The April/May intermonth spread for Dubai futures was assessed at minus $3.18/b Tuesday. The spread began the month at 5 cents/b backwardation, or $3.23/b higher.

Additionally, the May Dubai cash futures spread -- a proxy of spot market sentiment for Middle East sour crudes in Asia -- averaged minus $3.11/b over March, falling $3.09/b from the minus $0.02/b averaged over February.

Spot price differentials for several Middle East sour crude grades touched record lows over the month, as buying appetite vanished. April is expected to see more of the same, said market participants.

Lighter grades of Middle East crude are particularly vulnerable, said traders, as gaping demand for jet, gasoline and other transport fuels has run down product margins and subsequently, prices for crudes with high yields of these products.

"More [price] cuts on lighter crudes" could see premiums for grades such as Murban flip into discounts against medium and heavier grades like Upper Zakum, said a senior crude trader based in Singapore.

"It's a margin and demand problem," the trader added.

Saudi Arabia's energy ministry added this week that it would boost its oil exports in May to 10.6 million b/d, further flooding the oil market where prices have cratered as the coronavirus pandemic sapped demand.

The kingdom exported 7.29 million b/d of crude oil and 748,000 b/d of refined products in January, according to the latest figures released by the Joint Organizations Data Initiative.