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Analysis: Asia crude buyers brace for bullish summer spot market

Singapore — Traders of Middle East sour crude oil expect a surge in physical spot market prices as demand from major refining centers in Asia re-emerges after maintenance, they told S&P Global Platts this week.

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"There will be more demand this month as [refineries come] back from turnarounds, and there is higher demand from China," a crude oil trader based in Singapore said.

The cash Dubai spread between Month 1 and Month 3 -- often used as a barometer of sentiment for the Middle East sour crude market -- surged past $1/b levels to average $1.07/b to-date in April, from an average of 60 cents/b for the month of March, underscoring strength in the sour crude complex.

Thus far, tepid Q1 demand from Asian refining strongholds such as China, Japan and South Korea has kept a lid on sentiment despite supply tightness for medium and heavy sour crudes, market participants said. Price differentials for Middle East sour crude grades such as Murban, Upper Zakum, Qatar Marine and Banoco Arab Medium dipped into discounts or fetched slight premiums over their respective official selling prices in spot trading over the month of March, indicative of a slowdown in demand.

However, post-maintenance spot price differentials are expected to rebound for June-loading cargoes being traded this month, traders said.

"Quite sure it [Murban] will [trade in premiums]," a crude trader with a Chinese refiner said. "Just a matter of whether [the premium is] 10 cents/b or 30 cents/b."

The spread between Month 1 and Month 3 physical Dubai crude stuck to a tight range of $1.06/b to $1.08/b in the first week of April for June trading, Platts data showed Monday. On Monday morning at 10:00 am Singapore time (0200 GMT), the spread was holding at $1.06/b.

The sour crude complex has been in backwardation for exactly a year now, with supplies for Middle East barrels tightening in comparison with sweet crude on the back of OPEC production cuts. US-led sanctions have also crippled flows of similar crude grades from Iran and Venezuela.

A contango market structure for sour crude was last seen over March 2018, when the M1/M3 structure averaged minus 30 cents/b.

Lower quality, high sulfur crude has commanded a premium over higher quality, lower sulfur crude grades such as Brent-linked and WTI-linked barrels several times over the past year.

Meanwhile, the Dubai structure almost doubled between January and February this year, when US sanctions on Venezuela amplified the dearth of medium and heavy crude that formed a large chunk of feedstock for refineries in Asia.

The spread rose from an average of 32 cents/b over January to 62 cents/b in February, Platts data showed.

OPEC supplies continue to plummet as a combined result of planned production cuts and geopolitical events. The 14-country block pumped 30.23 million b/d in the month of March, Platts reported in its monthly OPEC oil production survey last week.

This is OPEC's lowest overall production in more than four years, with crisis-hit Venezuela contributing most to the decline. Volume from the sanctions-hit nation fell to a 16-year low of 740,000 b/d in March, according to results of the survey.

Meanwhile, Iranian volumes in the Asian market are expected to tighten in the coming months, traders said. They expect the US to clamp down on extensions granted to several countries allowing them to continue importing Iranian oil.

The current round of extensions provided by the US are set to expire in May.

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

--Herman Wang, herman.wang@spglobal.com

--Edited by Norazlina Juma'at, norazlina.jumaat@spglobal.com