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Global Market Analysis, 26 August 2022

This week's Global Market Analysis takes a look at the ripples starting to be felt in Asia-Pacific crude markets as a result of the conflict between Russia and Ukraine, and why it's never too early to worry about US winter fuel supply.

Murban weighs on Mideast Gulf sour crude basket

By Chen Ee Woon

The conflict between Russia and Ukraine has had a dramatic impact on commodity pricing, especially in Europe where crude, diesel and LPG markets that relied heavily on Russian exports have seen a significant drop in liquidity, hindering price discovery.

But ripples from the conflict have started to reach the crude markets in Asia-Pacific, upending quality relationships within the basket of crude which forms the underlying value of crude oil exports from the Mideast Gulf to Asia.

In a rare development this month, Abu Dhabi’s light sour Murban crude has been setting the value for the medium sour Dubai basket, signalling weak fundamentals for the otherwise popular grade in Asia.

General Index, US Crude to Asia

A 500,000 bl Murban crude cargo was delivered into the Dubai window after the convergence of x20 25,000 bl partials on 11 August. Murban is rarely cheap enough to be delivered into the Dubai basket due to its superior quality – lower sulphur and higher API – compared to the other grades in the basket, namely Dubai, Oman, Upper Zakum and Al Shaheen.

But efforts to plug the gap created by the redirection of Russian crude from Europe to Asia has distorted the typical relationship between crude values that make up the Dubai basket, at times pulling Murban below prices for medium sour crude.

A key reason for Murban’s weakness has been the flood of US crude hitting the market, much of which has made its way to Asia. The volumes have been larger than usual due to crude releases from the US Strategic Petroleum Reserves (SPR) that have aimed to cool down oil price rallies following the Russia-Ukraine conflict. US president Joe Biden has earmarked 180mn bl of SPR crude for release between May and October this year. The releases are on top of the average 3.0-3.2mn b/d of crude which the US has been regularly exporting since 2019, mostly made up of light sweet WTI Midland crude.

WTI Midland crude competes directly with Murban in Asia and has at times been landing in the region at a $2.00/b discount to the Abu Dhabi grade against the Dubai benchmark this month, displacing Murban among Japanese, South Korean and Indian refiners, traders said.

The Brent-Dubai Exchange for Swaps (EFS), a measure of the price difference between light sweet arbitrage crude and Mideast Gulf sour crude, has also narrowed significantly recently, incentivising refiners to buying barrels from further afield.

General Index, Brent Dubai EFS

A crude basket

Price reporting agency S&P Global Commodity Insights (formerly Platts) operates the Dubai and Oman partials window. It first added Abu Dhabi’s Murban crude into the Dubai and Oman baskets in January 2016, following a massive buying spree by Chinese state-controlled trading firm ChinaOil four months earlier – during which it had bought almost the entire volume of freely traded Dubai, Oman and Upper Zakum crude – raising questions about the viability of the Dubai basket as a benchmark at the time.

Adding a more expensive stream of light sour crude, such as Murban, to a basket of medium grades was a way to shore up the volume of crude underpinning the basket as well as capping its value in case of a future buying spree, especially by Chinese state-controlled refiners, who were not large consumers of Murban crude.

Currently the Dubai basket contains Dubai, Oman, Upper Zakum, Al-Shaheen and Murban crude, while Murban is the only other grade that can be delivered into the Oman basket besides Oman itself. At any one time, the price of the Dubai and Oman baskets should be determined by the cheapest crude on the market as the basket’s trading mechanism allows the sellers the option to deliver their crude of choice. Normally, the cheapest crude is Upper Zakum or Oman while higher quality Murban trades at a premium to the other grades.

In order to ensure that the two baskets continue to reflect fundamentals of Mideast Gulf medium sour crude, Platts introduced a Quality Premium (QP) mechanism for delivery of Murban crude into the Dubai basket. The QP is set at 60% of spread between the average of Murban and Oman prices in the previous month, with no QP value set if the spread falls below US$0.50/b.

General Index, QP formulae

Under the mechanism, sellers who wish to deliver Murban crude into the window must be compensated an amount equivalent to the QP by the buyer. But the QP was created at a time when WTI crude was not flowing into to compete with Murban. The ban on US crude exports was repealed in December 2015, just a month before the Murban QP had been introduced.

In today’s market though, where WTI flows into northeast Asian refiners have been firmly established, any upsurge in exports of the grade could pressure Murban values to the point its price falls below the medium sour grades in the basket, depending on the QP for that month.

General Index, IFAD Murban vs Oman

The efficacy of the QP mechanism – where the current month’s QP is calculated using Murban and Oman data from the previous months – is itself debatable. During periods of volatility the use of the previous month’s data as a predictor of current market conditions will not be an effective way to support the medium sour identity of the Dubai basket.

The current system will also cause pricing dilemmas for National Oil Companies (NOCs) in the Mideast Gulf which price their medium and heavy sour crude using the Dubai and Oman baskets and will see the underlying price for their crude impacted by fundamentals unique to the Murban market. NOCs who have transitioned to pricing off DME Oman, such as state-controlled Saudi Aramco and Kuwait Petroleum Corporation (KPC), will be less affected by downward pressure on Murban values.

Obtaining a more accurate QP value could be part of a solution that would keep the Oman and Dubai baskets in line with market fundamentals. The QP could be based on real-time futures contracts such as Oman prices from the Dubai Mercantile Exchange (DME) and Murban prices on the ICE Futures Abu Dhabi. They could also be calculated on a weekly or fortnightly basis, which would be more reflective of market conditions compared to a retroactive monthly indicator.

Never too early to worry about US winter fuel supply

By Jeffrey Bair

There are smart things to add to your US calendar every fall: college exams, vacations, deadlines for holiday shopping.

Another smart thing to add for late summer: the time when folks begin worrying about winter energy supply.

Meaning right now.

To dovetail with concerns about the flow of oil and natural gas into Northwest Europe, add concerns about whether there will be enough diesel and heating oil come the chills across the US Northeast and New England.

General Index, ULSD stocks

Alan Apthorp of Mansfield, a major buyer of fuel in Colonial Pipeline markets, said in a paper this week that the winter could bring volatility in diesel markets in Padd 1, representing the East. The problem could repeat the situation this spring when Colonial shippers kept barrels in the Gulf Coast to dodge exposure to steel backwardation and avoid risk. Diesel ran short at the north end of the line.

ULSD is running at a stout premium to gasoline, Apthorp notes, with the potential “a confluence of factors will cause tightness or even shortages for diesel consumers this winter.”

Nationally diesel inventory’s moving average is running about 20 million barrels below in the EIA survey of where they were in late August 2019, the last summer before the pandemic. Inventory in New England, where homeowners depend on heating oil to beat back the winter, is about half of what it was at this time three years ago.

Chen Ee Woon
Chen Ee Woon, Energy Analyst
Jeffrey Baird, U.S. Refined Products Pricing Director
Jeffrey Bair, Americas Refined Products Pricing Director
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