DME Oman marker price supported by divergent Chinese demand

Singapore — An uptick in crude demand from China could be lending support to the DME Oman marker price this month as it averages at a record high against Platts Dubai crude assessments, crude oil traders told S&P Global Platts this week.

For this month to date, the DME Oman marker price has averaged at $3.17/b above Platts M1 Cash Dubai, the highest spread between the two Middle East markers since averaging $1.81/b for July 2008, Platts data showed.

Oman's premium has been sustained at a time when plunging oil demand has eroded margins from even the most premium crude grades exported to Asia from the Middle East. Spot market differentials for popular Asian imports such as Murban, Al-Shaheen and Upper Zakum have all dropped into deep discounts over March and April due to dissipating demand in the wider Asian market.

But in pockets of China refining activity has conversely ticked upwards, while the rest of the world cuts back on coronavirus-led erosion of product margins. Demand from China, where nearly 70-80% of monthly Oman exports end up, could be keeping a floor under prices for the medium sour crude, said traders.

The stronger values for DME Oman could be attributed to buyers in China perceiving the oil as "cheap" even at current levels, traders said.

China has a firm floor set for domestic oil product prices at $40/b as part of government measures to support the domestic refining industry.

The refining margins for cracking a basket of imported crudes in China rose by Yuan 577/mt ($82/mt) to Yuan 300/mt in March from being negative in February, according to JLC calculations based on actual product sales price.

China's crude imports are expected to rise above 10 million b/d in the coming months from the eight-month low of 9.7 million b/d in March as Chinese refineries ramp up run rates, a Beijing-based analyst said.

In April, China's planned crude run for April was expected to recover to about 12.5 million b/d, taking nearly two months to reach about 90% of the level achieve in January after falling by about 3.3 million b/d in February, an S&P Global Platts survey has shown.

China's share of Oman Blend exports, which averaged at 738,106 b/d in March, rose to 92% during the month from 90% in February, according to latest data from Oman's Oil and Gas Ministry.

However, some traders were baffled by the disparity between the two price benchmarks.

"Fundamentally DME [Oman at] $3/b over [Dubai] value makes no sense whatsoever. This is a turgid market, no like-for-like crudes should have such deltas," said a Singapore-based crude trader.

Sentiment on the Middle East sour crude market has remained sluggish this month despite the OPEC+ production cut agreement last week as Asian demand for crude oil is expected to remain weak on the back of the coronavirus pandemic, traders said.

Global demand in April is expected to be 29 million b/d lower than in April 2019, while demand in May would be 26 million b/d lower year on year, according to IEA estimates.

"I had a thought [that this] could be Chinese refiners buying only base slate crudes so they can run as hard as they can, but you don't leave $4/b on the table," said the trader.

"These guys can run anything and will run anything at a price. The rule of China is the cheapest oil wins," the trader added.

DME Oman, Platts Oman prices diverge

With the strong values seen for DME Oman marker price, this has widened its spread to Platts M1 cash Oman assessment, with DME Oman futures averaging a $3.11/b premium to Platts Oman for April to date, according to Platts data. In comparison in March the spread stood at $0.575/b.

In addition, April 6 saw DME Oman futures daily price marker hit a $4.65/b premium to Platts Oman assessments, the widest spread since September 26, 2018, when a record spread of $7.61/b was seen.

The DME Oman futures daily marker price represents the volume weighted average of DME futures trades in the five minute period up to 16:30 Singapore time each day, except on the expiry day at the end of the month.

Platts Oman assessments represent the value of Oman crude, with the alternative delivery mechanism, which allows the nomination of Abu Dhabi's Murban crude as an alternative delivery grade, with a quality premium. The quality premium for June loading cargoes is $0.6376/b.

Murban was introduced as an alternative delivery crude for Platts Oman and Platts Dubai at the start of 2016.

April's MOC for sour Middle Eastern crude has seen 24 partials of Oman crude changing hands so far this month, with one cargo convergence between seller China's Unipec, which had declared Murban to buyer Total.

In March there were 40 partials of Oman crude traded through the MOC with one convergence cargo, seeing a Murban declared by Unipec to PetroChina Hong Kong.

DME Oman volumes have dipped month to date in April, compared to March, with an average of 4,349 futures contracts trading month to date, compared with an average of 5,121 futures contracts trading in March.

In February 2016, the DME amended the way it calculates the front-month Oman crude marker price on the final trading day of the month.

The front-month Oman Marker Price, or M1, on expiry day is calculated using the marker price for the second-month Oman contract, or M2, and the average M1/M2 spread over the preceding three trading days.