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Highlights

Dubai M1-M3 up $3.56/b month-on-month

Medium, heavy grade to rise more than lighter grades

Weak refining margins weigh on sentiment

Singapore — Middle East crude producers Saudi Aramco and Abu Dhabi National Oil Company will likely raise the official selling price differentials of their respective crude for the third consecutive month on the back of a strong uptick in the region's crude structure, market participants said.

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Aramco is expected to raise the OSP differential of its Arab Light crude bound for Asia in August by between 80 cents/b to $3/b, participants surveyed by S&P Global Platts said this week.

Earlier in June, the oil producer raised the Asian OSP differential of the crude by $6.10/b from minus $5.90/b for June to a premium of 20 cents/b for July.

The main driver for the expected rise in OSP differentials is the uptick in the benchmark Dubai crude structure, reflected by the spread between physical cash Dubai and same-month Dubai futures, also known as the M1-M3 spread.

The spread has risen largely due to supply side factors, with OPEC+ alliance extending the production cut of 9.6 million b/d to July. The alliance have also increased pressure on Iraq, Nigeria, Angola and Kazakhstan to comply with the deal, with compensatory cuts expected to be made over July-September in addition to the countries' set quotas.

DUBAI/OMAN STRUCTURE

A key price indicator for Middle East sour crude market, the M1-M3 spread has risen to average at 83 cents/b premium in June so far -- the widest since January, and up $3.56/b from minus $2.73/b average over May, Platts data showed.

The price indicator, tracked by Middle East producers to define the core direction and extent of price hikes or cuts, suggests that producers could raise their respective OSP differentials for August.

Similarly, Platts cash Oman spread to Dubai futures has risen $3.31/b from minus $2.44/b average in May to a premium of 87 cents/b in June.

"Our model says $3/b increase but [it also] depends on production increase I believe," said a Singapore-based crude trader with a European oil firm.

Middle East producers will likely pare down the potential increase in their respective OSPs in view of oil product cracks, which have risen from previous month but have remained largely fragile, some said.

"Theoretically, it will not be a surprise if Saudi increases [their OSPs], but ... considering current refining margins, they could soften the level of increments," said a trader with a North Asian crude refiner.

Second-month gasoil swap crack versus Dubai averaged higher at $5.74/b for June so far, up from $4.80/b average in May, but still lower than the $9.96/b average for the first four months of 2020, Platts data showed. In comparison, gasoil crack averaged at $16.13/b for the whole of 2019.

"Structure is up $3.50/b, but Aramco cannot raise so much -- $2/b higher at most. Oman and other grades [are] already distressed [this month], no reason OSPs should be hiked more than $2/b," said a second North Asian crude trader.

Participants surveyed also indicated that they expect the medium, heavy crude grades to receive a larger increase compared to the lighter grades.

"Medium/heavy [grades should be] looking at a $2/b raise [but] I think lighter barrels [will have a] lesser increase. Saudi will [likely] be exporting less [heavier barrels] due to their summer direct burning requirement," said a Singapore-based crude trader.

VIEWS ON MURBAN MIXED

While ADNOC was expected to increase the August OSP differential of its medium sour Upper Zakum crude, views were mixed on the lighter grades including key grade Murban.

Some expect the OSP differentials for the lighter grades to be raised while others think it should be lowered or maintained at current levels.

Earlier in June, ADNOC raised Murban's July OSP by $5.45/b from minus $4.45/b in June to a premium of $1/b, putting it on par with Upper Zakum, which was increased from minus $3.95/b in June.

"My thoughts are, this month ADNOC grades almost all [traded in] discounts, [except] only Upper Zakum [which] was supported until [recently], but they could just follow Saudi [price changes]," said the first North Asian trader.

Spot cargoes of August-loading Murban last traded at OSP minus 70 cents/b, down from 10 cents/b discounts at the start of the trading cycle this month, Platts data showed.

Sentiment for the light sour barrels have been weighed by weak refining margins, high OSPs as well as reports of the release of some Murban crude stored in floating tankers.

"Upper Zakum [should see] some support but Murban should be lower until gasoline [cracks] rebounds [further]," said a Southeast Asian crude trader.

While second-month 92 RON gasoline swap crack to Dubai swap has averaged higher in June at $3.02/b, up from 34 cents/b in May, it is still less than half of the $7.07/b average in January and February, and lower than the $5.41/b average for the whole of 2019, Platts data showed.

"Most refineries [are] running best on hope. People [are] hoping for sudden prompt demand [for oil] to come back [but product] cracks [for now remain] volatile," said the Southeast Asian crude trader.