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Brent/Dubai spread tightens to 2.5-month low on restricted arb

Singapore — Benchmark Dubai crude futures' discount to ICE Brent tightened to a 2.5 month low Tuesday mid-morning in Singapore, as surging freight rates culled arbitrage flow of Brent-linked crude grades to ease demand requirements in the East.

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At 11 am in Singapore (0300 GMT), the December Brent/Dubai Exchange of Futures for Swaps spread, or EFS, was notionally pegged at $2.14/b, down from S&P Global Platts' $2.38/b assessment at 4:30 pm Singapore time (0830 GMT) Asian close on Monday.

The latest pegged level is the narrowest for the EFS spread in nearly three months. The Brent/Dubai spread -- which serves as a gauge for demand of low sulfur crude versus high sulfur crude -- was last narrower at $2.12/b on July 29, Platts data showed.

The East of Suez markets for VLCCs continued to rally even after touching 10-year highs last week, as the shipping markets grappled with a shortage of tanker tonnage following sanctions on China's COSCO Shipping earlier this month.

As a result, incoming arbitrage for grades from the North Sea, the Mediterranean, West Africa and the Americas have been heavily restricted, leading to a net shortage of crude in Asia's typically diverse pool of supply options.

Without incoming global arbitrage, Asian buyers have been eyeing crudes loading from the Persian Gulf and other nearby destinations, such as Far Eastern Russia, which transports several crude grades to North Asia via pipelines and loading terminals in a matter of days.

Grades such as medium sour Oman crude have surged past Brent prices in recent days, despite being of poorer quality compared to low sulfur, lighter crudes such as Brent.

Meanwhile, intermonth Dubai futures spreads ticked lower Tuesday morning. The November/December spread dropped to 97 cents/b backwardation at 11 am in Singapore (0300 GMT) on Tuesday, compared to $1.01/b Monday evening at 4:30 pm (0830 GMT).

The December/January Dubai futures spread dropped to 79 cents/b on Tuesday morning. It was assessed at 85 cents/b Monday.

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

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