Backwardation in front-month Dubai futures spreads narrow amid signs of rally faltering

Singapore — Front-month intermonth spreads in the benchmark Dubai crude complex continued to narrow Dec. 18 morning in Asia as spot differentials in the Middle East crude market eased further in the week started Dec. 13 from their recent multimonth highs.

Backwardation in the prompt January/February Dubai spread was valued at 18 cents/b at 11 am Singapore time (0300 GMT), 6 cents/b narrower from the Asian close on Dec. 17. The February/March spread also narrowed to 5 cents/b from 8 cents/b Dec.17, S&P Global Platts data showed.

The Dubai complex has eased steadily in the last few trading days after a spike in premiums earlier in the month on the back of strong buying by regional refiners looking to wrap up procurement ahead of year-end holidays.

Indian Oil Corp. was heard to have bought Iraqi Basrah grades in a tender that closed Dec. 17, but details were not immediately available. The refiner had issued three tenders with options to buy crude for February-March 2021 delivery from various regions.

India's MRPL is also due to award its tender in the week started Dec. 13 for 1 million barrels of crude oil for Feb. 13-25, 2021, delivery.

Traders said premiums in the Middle East crude market have softened as some regional refiners opted to pick up cheaper arbitrage barrels.

Chinese refiner Rongsheng bought US crudes, prompting some sellers to offer down Middle East cargo to remain competitive against arbitrage barrels, as a slew of Indian purchase tenders remain outstanding.

With affordable freight levels and a better product yield from lighter US and West African crudes, the likelihood of India opting for these grades over Middle East crude seems high, traders said.

Refinery run rates in India have also reached near-normal levels at a faster-than-expected pace and product demand specifically for gasoline and jet fuel is growing, leading to greater demand for lighter crude oil.

"Since demand for gasoline is higher than diesel, Indian refiners will avoid importing gasoline. Also, buying lighter crudes helps maintain refinery throughput as well," a trader with a South Asian refiner said.

Meanwhile, the Brent/Dubai Exchange for Futures for Swaps, or EFS, spread narrowed midmorning in Asia on Dec. 18.

The EFS was pegged at a premium of 88 cents/b at 11 am Singapore time on Dec. 18, narrowing 9 cents/b from the assessment of a 97 cents/b premium at the Asian close on Dec. 17, Platts data showed.