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Brent/Dubai spreads narrow despite looming IMO 2020 deadline

Singapore — Benchmark Dubai crude futures' discount to Brent continued to narrow in early morning trading in Asia on Thursday, even as the International Maritime Organization's low sulfur cap rules on marine fuel from January 2020 draws closer and toward the tail end of September trading cycle.

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At 10 am in Singapore (0200 GMT), September Brent/Dubai EFS tightened to $2.20/b, narrower than $2.28/b seen at the close of trading in Asia on Wednesday at 4:30 pm Singapore time (0830 GMT).

Some market participants said trading liquidity for the EFS would now begin to roll over to the October spread, as September trading comes to a close in the last few trading days of July.

Tightening in the October Brent/Dubai EFS was even more noticeable, with the spread narrowing from $2.91/b Wednesday evening to $2.79/b Thursday morning, while the November EFS dipped from $3.30/b to $3.13/b over the same duration.

"The [September] EFS was above $3/b just last week," a crude broker based in Singapore told S&P Global Platts, pointing to the quick tightening of the spread, which is tracked as a proxy for low sulfur/high sulfur crude differentials.

The EFS acts as an aggregate proxy of several market indicators, including crude oil supply for the North Sea versus the Persian Gulf, or arbitrage economics from Europe to Asia, and also pricing for Brent-linked versus Dubai-linked barrels.

Many market participants expected the quality differential between Brent, which is a light low sulfur grade and Dubai, a medium high sulfur crude, to amplify as the deadline for marine vessels to use lower sulfur fuels nears.

Crude traders expected demand for lower sulfur, Brent-linked grades to jump and that for fuel oil-rich, higher sulfur blends linked to Dubai to drop.

The EFS ought to widen in a reflection of this phenomenon, they told Platts. However, the current tightening of the spreads has left many traders wondering what market dynamics were overshadowing the IMO 2020's deadline.

"This is going against the IMO trade," said a derivatives trader last week, when the September EFS began to retreat from above $3/b to mid $2s/b.

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

--Edited by Nurul Darni, nurul.indriani.darni@spglobal.com