TOCOM Energy

Brent and Dubai spread widens sharply from year lows

Wu Hai

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September 28, 2023 5 min read

Crude oil markets consolidated after a volatile week that saw oil benchmarks remaining range bound around recent highs. Oil benchmarks had slumped after the Fed flagged at least one more interest hike for the year while “higher-for-longer” mantra for rates dampened prospects for speedy rate cuts in 2024, but Russia’s abrupt decision to impose a full ban on gasoline and diesel exports sent oil higher. Prompt month spreads for crude oil future contracts had widened in backwardation, indicating tighter supply and demand balance in the short term. European gasoil markets however, eased back from tight supply driven rally, with prompt month calendar spread and crack spread settled lower, rising imports are seen from both east of the Suez and the United States as arbitrage economics improved.

Recent price moves had also widened the premium of Brent to Dubai quotes. The EFS contract for November, a key metric in comparing Dubai-related crude oil versus grades pricing against Dated Brent, which equal to the premium of Brent crude oil futures to Dubai crude oil swaps had jumped to a premium of $2.74 a barrel last week. A similar trend was observed among the spread of ICE brent and JPX Dubai crude oil future contract as JPX Dubai contract settles against Platts’ Dubai assessment.

The uptick was driven by a surge in U.S. crude prices which in turn shut arbitrage routes for U.S crude to Europe and pulled benchmark Brent higher and widened the Brent and Dubai spread. According to platts, WTI Midland has set the price of North Sea Dated Brent in more than half of the sessions since its introduction into the Dated Brent mechanism, so reduced flows of WTI would likely see a direct boost in Brent prices.

The strength of WTI price is driven by Total Energies who launched a physical buying spree of US Gulf Coast barrels according to Bloomberg. The competition for US crude oil happens at a time when global supplies have tightened significantly and US stocks drain away. It may be also a reflection that refineries are willing to increase runs as refining margins remain elevated.

The Brent–Dubai price spread is selected as an indicator representing the economic of crude oil movements from the Atlantic Basin and Middle East to Asia. A widening of the Brent and Dubai spread will make Dubai linked oil grades more attractive than Brent linked ones. The correlation between these benchmarks is often actively traded, alongside exchange-listed instruments that are used by market participants to hedge and manage risk of their physical exposure. The latest shift in the typical Brent-Dubai price differential has resulted in one of the oil market’s hottest trades this year. Open interest of traders on the spread hit a record high and jumped by 67% in July compared to the same month of 2022, per data cited by Bloomberg.

The benchmark Brent-Dubai price spread has narrowed sharply in recent trading cycles, driven by OPEC+ supply cuts, and increased flow from the US to Europe. As crude oil’s value is also driven by demand for refined petroleum products, the tightness in residual fuel oil versus oversupplied naphtha markets since February also marks a significant swing in relative netbacks for the two benchmarks.

Some of these driving forces has reversed in the short term, the tightness in the HSFO market for example, has relaxed due to a rise in overall availability in the physical market in recent weeks, with the end of the summer in the Middle East lifting supply on the international market. Looking ahead, sustained output cuts from OPEC producers and new refining capacity coming online designed to process sour crude could help maintain Dubai’s strength to Brent until the end of next year.