Benchmark Dubai crude intermonth spreads rallied Wednesday in Asia ahead of a meeting next week at which OPEC members are expected to reach consensus on the terms of a final production agreement that would limit the group's output.
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The spread between December and January Dubai crude swaps was seen at a one-month high of minus 29 cents/b Wednesday at 13:33 pm Singapore time (0533 GMT). It was last assessed at minus 36 cents/b Tuesday, up from a nine-month low of minus 66 cents/b on November 8, S&P Global Platts data showed.
The gaining of momentum in the market around a potential OPEC production cut was putting upward pressure on the Middle Eastern sour crude market amid expectations those barrels would be the first impacted by any cuts, trading sources said Wednesday.
"The market may feel OPEC may reach some agreement at the end of this month," said a North Asian crude trader, adding that the physical Middle East sour crude market also remained strong amid steady end-user demand.
OPEC will meet in Vienna on November 30 to work through the details of a proposed production freeze at 32.5 million-33 million b/d from early 2017.
"Market [is] certainly pricing in OPEC cuts, which means if [there were to be] any non-agreement next week, then market [will] dump hard," said a Singapore-based crude trader.
Another trader noted that any tightening in availabilities would impact the quality spread between sour crudes in the Middle East and sweet crudes in Northwest Europe.
This spread is typically characterized by the exchange of futures for swaps between ICE Brent futures and Dubai swaps.
The front month EFS was last assessed at $2.02/b Tuesday, up slightly from a one-year low of $1.95/b on November 9. The EFS was last lower on October 29, 2015, when it was assessed at $1.79/b.
Structure in ICE Brent futures compared with Dubai swaps was also showing different degrees of contango.
While the spread between January ICE Brent futures and February ICE Brent futures stood around $1.01/b in contango Wednesday at 13.33:pm Singapore time (0533 GMT), the spread in Dubai swaps between January and February in contrast stood at around 29 cents/b at the same time.
PHYSICAL SOUR CRUDE MARKET REMAINS SUPPORTED
Traders also pointed to the already strong fundamentals in the Middle East sour crude market, with lower availability of Middle East crudes on offer this month while demand for crude from regional refiners was expected to be steady as product cracks remain at healthy levels.
"[There are] plenty of people buying... perception is it's [for] winter [demand and] of course OPEC [expected cuts]. Margins are great [so] no one [is] cutting runs," said a crude trader.
Most recently, Taiwan's CPC was heard to have issued a tender seeking various Middle East sour crude grades for January loading. That tender closed on Tuesday and was valid until Wednesday.
In addition, oil major BP was seen bidding for 500,000 barrels of January-loading Upper Zakum crude for the second consecutive day on the Platts Market on Close assessment process Tuesday. The bid stood at parity to the grade's official selling price at the end of the MOC process.
On the supply side, scheduled field maintenance will cut the volume of Al-Shaheen crude exports to 10 cargoes of either 500,000 or 600,000 barrels for January loading, from 14 cargoes the month before. Lower availability of January-loading cargoes has helped propped up cash differentials of the medium heavy sour crude this month.
Meanwhile, Iraq will export an average 3.163 million b/d of Basrah crude oil in December, down 2.4% from November's program, with Basrah light seeing an increase and Basrah Heavy seeing a dip in volumes, according to the provisional loading schedule seen by Platts last week.
DEMAND COULD SPILL OVER TO NON-OPEC SUPPLIERS
The sour barrel is the sector likely to tighten the most should any OPEC cut be implemented, traders said.
Iranian and Saudi crude is typically sold on term contracts, with the majority of exports from both countries going to Asian refiners.
A production cut could lead to refiners looking at replacing those lost barrels. Some traders indicated that Oman crude could see an immediate impact on demand as market participants look to short-cover their requirements with the grade.
Oman is the largest non-OPEC producer in the Middle East and exports around 800,000 b/d of crude without destination restrictions.
However, one trader noted that despite not being an OPEC member state, Oman may join in on a production cut. "There is the question as to whether they [Oman] join any cut as well," the trader said.
OPEC's secretary general Mohammad Sanusi Barkindo and Iran's oil minister Bijan Zanganeh recently said they were optimistic that OPEC members would agree to proposed production cuts at the group's November 30 ministerial meeting.
OPEC ministers are striving to reach consensus on how to implement the group's first production cut in eight years. If an agreement is reached later this month, it would end the group's policy since late 2014 of pumping at high levels to defend market share.
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