CRUDE MOC: Middle East strength propels Dubai complex into premiums

Singapore — The Dubai crude cash/futures (M1/M3) spread began August trading on a bullish note at the start of the monthly trading cycle, spurred on by tightening OPEC+ crude supply to Asia, market participants told S&P Global Platts.

The spread -- a key indicator of spot market sentiment for sour crude in Asia -- clocked in at a premium of 42 cents/b on June 2, steady from 43 cents/b assessed on June 1 at 4:30 pm (0830 GMT) in Singapore, the first time it traded in positive territory since February. At that time, it briefly touched a premium of 6 cents/b on Feb. 2, before firmly diving into a state of contango from then until end-May.

The Dubai M1/M3 spread averaged minus $2.73/b over May, with demand for Middle East crude oil fragile in Asia, traders said.

Still, OPEC+ production cuts have mitigated some of the imbalance in crude markets from a supply perspective, they added. The rebalancing was evident in the rise of the M1/M3 spread from historic lows averaged over April, at minus $9.15/b, Platts records show.

For the current cycle, market participants largely expect a dynamic continuation of the previous month, as a slow return of oil demand in Asia could be quickly washed out with equivalent reductions in OPEC+ production cuts.

An inflexion of long-standing contango market structure to backwardation could exacerbate the situation, with millions of barrels of crude floating in VLCCs capable of being supplied if intermonth Dubai crude spreads hit the right degree of backwardation, traders said.

Price hikes from Middle East producers on contracted term volumes could also discourage buyers from ramping up run rates too swiftly, traders said.

"Refining margins are currently challenging," a China-based crude trader said, adding that big price hikes from producers could reverse the uptrend in Middle East sentiment this month by squeezing refining margins and stamping out demand.

Suppliers from the Middle East, many of whom are OPEC+ members, are expected to issue considerable price hikes in coming days on the back of their efforts to curb supply, which have boosted oil prices globally in recent weeks.

OPEC+ could meet as early as June 4 to determine the degree of production cuts from July 2020 onwards.