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Easing freight rates lend mild support to demand for Middle East crude

Singapore — Benchmark Dubai crude futures' premium to ICE Brent ticked up in mid-morning Asian trade on Thursday as easing freight rates open up avenues for storage of excess crude barrels and stimulate demand for Middle East crude in Asia.

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At 11 am in Singapore Thursday, the May Brent-Dubai Exchange of Futures for Swaps widened to minus $4.62/b, compared with minus $4.43/b assessed at the 4:30 pm close in Asia on Wednesday.

The Dubai end of the spread held up even as ICE Brent futures dipped during Asian trading hours Thursday morning as optimism around potential US stimulus measures to combat declining economic activity lost steam in global oil markets. May ICE Brent futures were down 31 cents/b from $27.51/b at 4:30 pm Wednesday in Singapore (0830 GMT), to $27.20/b at 11 am (0300 GMT) Thursday morning.

However, May Dubai futures declined 12 cents/b to be pegged at $31.82/b at 11 am on Thursday.

FREIGHT DIPS

Freight rates for cargoes shipped from the Persian Gulf to the East eased from around $6/b in recent weeks, and could stimulate more buying interest of sour crude barrels, which are currently being offered at multi-year lows, crude market participants said Thursday morning.

Freight "seems to have come off a bit from the peak," a buyer based in Singapore said Thursday morning.

However, buyers seem to be in no rush to procure excessive cargoes with Middle East producers set to maximize output in coming months, they said.

Crude production from OPEC+ countries is expected to jump rapidly with the end of the current agreement limiting volumes at the end of March.

Saudi Aramco for instance, said it would increase production to 12 million b/d starting April.

"Our maximum sustained capacity is 12 million b/d, [and] 300,000 b/d is coming from our inventories, whether in the kingdom or out of the kingdom," CEO Amin Nasser said on an earnings call with analysts last week.

"We are looking at how long we can maintain that additional 300,000 b/d. It is definitely for sure in April, and we're looking at other months maintaining higher production above our maximum sustained capacity."

DEMAND FOR STORAGE

Additionally, talk of refinery run cuts as product margins continue to slide would imply that incremental demand for crude may come from traders looking to store volumes rather than from end-users, they added.

With intermonth Dubai in deep contango, many traders will be eyeing freight economics for viable storage to float excess crude barrels, market participants said Thursday.

"Contango very deep at the front," a trader with a Southeast Asian refinery said on Thursday, adding that "short term [storage economics] would be quite supported at these levels."

The prompt April/May Dubai spread was pegged at minus $2.72/b at 11 am (0300 GMT) on Thursday in Singapore, slightly lower from minus $2.63/b assessed on Wednesday.

The May/June Dubai spread ticked up, however, pegged at minus $2.26/b at 11 am, compared with the assessed minus $2.33/b at 4:30 pm (0830 GMT) on Wednesday.

A number of traders picked up several million barrels of Middle East sour crude priced at deep discounts via the Platts Market on Close assessment process in Asia Wednesday evening, leading market participants to point out that these were likely destined for storage in tanks or on ships.

The subsequent demand for floating storage for May crude cargoes on VLCCs could sustain freight in coming weeks, traders said.

"Freight is off from the peak, but rebounded last night," the second trader said.