CRUDE MOC: Middle East crude spreads, spot market premiums rally as supply cuts ramp up

Singapore — Discounts of benchmark cash Dubai and Oman against July Dubai futures rose sharply week on week as sentiment firmed in the Middle East sour crude market, following price hikes and production cuts from producers aimed at clearing excess supply from the market.

Additionally, the International Energy Agency on Thursday said it sees signs of the oil market rebalancing faster than previously expected. In its latest monthly report it said oil demand would be 8.6 million b/d lower this year, trimming its previous forecast of a 9.3 million b/d reduction.

The July Dubai cash/futures spread averaged minus $3.10/b for the week ended May 15, and was assessed at minus 89 cents/b on Friday. This is up considerably from minus $4.86/b averaged over the week of May 4-8, Platts data showed.

Similarly, the July cash Oman spread to Dubai futures ticked up to an average of minus $2.67/b this week, from an average of minus $4.35/b last week.

Price hikes from producers such as Aramco, ADNOC and SOMO, in tandem with production cuts to monthly volume allocations, brought Asian crude buyers to the spot market in search of cheaper alternatives by the latter half of the week, market participants said.

The resulting surge in spot demand for Middle East crudes sent spot price differentials up rapidly. For instance, trading sentiment for Abu Dhabi's light sour Murban crude veered around flat to a small premium at the start of the week. By mid-week, buying ideas had moved up to bids of 50 cents/b premiums over the Murban July OSP. Bids emerged on the Platts crude cargo Market on Close assessment process, showing Murban buying interest at around 75 to 80 cents/b on Thursday. By Friday, Murban buying ideas were at around $1/b over the OSP, according to market reports.

Similar upward movements were seen for other grades. Bids for Upper Zakum placed in the Platts crude cargo MOC process moved up from 45 cents/b on Wednesday to $1.40/b Friday, while in the spot market, traders reported June-loading cargoes of Basrah Light and Heavy sold into China at $4/b premiums over their OSPs.

The latest buying sentiment is a drastic upswing from last month, when competitive pricing from Middle East producers saw market rates dive into deep discounts, going as low as $2-$3/b under OSPs for some grades.

Meanwhile, Dubai paper spreads momentarily flipped into backwardation during the week, with the prompt June/July Dubai crude futures spread assessed at plus 14 cents/b on Thursday, up from minus 48 cents/b Wednesday. However, by Friday, the spread had edged down to a contango of minus 1 cent/b.

Still, the brief flip could add to the slew of indicators pointing to an underlying shift in market momentum, following on the heels of Middle East crude producers hiking their official selling prices earlier this week, traders said.

The move would "draw out all the storage," one end-user said, adding that "when the market becomes backwardated, sellers will have an incentive to bring out cargoes from storage."

The prompt Dubai futures spread was last in backwardation on March 5, at 3 cents/b, Platts data showed, but from then until now has traded in the negative, falling as low as minus $4.09/b at one point, on April 21.