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Analysis: Asian sour crude market flails amid weak demand

Singapore — Spot market demand for sour crudes originating from the Persian Gulf has slipped in recent weeks amid ongoing refinery turnarounds and inflow of overseas crude barrels into Asia, market sources said Friday.

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"[There is] less demand for Persian Gulf crude grades, [due to] turnaround season and arbitrage [flowing in]," a crude trader told S&P Global Platts this week.

Approximately 2 million b/d of Asian refining capacity -- or four cargoes of 500,000 barrels each day -- is expected to be offline at various points in the first quarter of 2019, according to Platts calculations.

Additionally, higher crude oil prices combined with easing freight on routes to Asia have made arbitrage routes more competitive to Middle East sour grades.

"There are arbs incoming [from] US to Asia [as] freight is coming off," said a China-based trader on Friday. The trader's comments were echoed by several end-users, refiners and other market sources so far this month.

"WTI Midlands seen offered quite cheap," the trader added.

"Arbs [are] wide open and expected to remain so for next year," a crude trader based in Singapore said at the end of 2018.

Additionally, market sources said the looming end of crude import waivers granted by the US to eight countries with existing contractual agreements with Iran may provide some support to a weakening market structure in the coming months.

"The situation looks a little bit oversupplied to me but it depends on [how] the market will balance the end of the waivers against the fall in demand from the maintenance season," the China-based crude trader added.

The spread between March and May cash Dubai -- otherwise known as the Dubai M1-M3 spread -- narrowed to a month-to-date average of 11 cents/b as of January 10.

Despite dipping into a contango of minus 5 cents/b briefly on January 7, the spread has sustained itself in backwardated territory for the last several months. The monthly average of the M1-M3 spread was last in contango in March 2018, when it averaged minus 30 cents/b for the month, Platts data showed.

The Dubai M1-M3 spread is widely tracked by traders of Middle East sour crude as a proxy of market direction. A contango in the spread would imply weakening demand or oversupply for sour crudes from Asian refiners.

--Eesha Muneeb, eesha.muneeb@spglobal.com

--Edited by Ikhhlaq Singh Aujla, ikhhlaq.singh.aujla@spglobal.com