TOCOM Energy

Dubai crude oil structure firm, lifted by tighter than expected Middle East sour crude supply

Crude oil futures were higher last week as oil benchmarks moved up towards the higher end of the recent trading range, this upward trend is underpinned by a prevailing bullish sentiment across Europe and the wider Atlantic Basin, fueled by low stock levels, geopolitical risks in the Middle East and the extension of OPEC supply cuts. The OPEC+ cuts will lead to lower production from the group at 34.6 million bpd in the second quarter, against an earlier forecast that output could rise above 36 million bpd in May as producers unwind supply cuts. Lifted by tighter than expected Middle East sour crude oil supply and higher OSPs for the April-loading cycle, prompt time spreads in the JPX Dubai futures market reached a near four-months high. Similar bullish spread could be seen in WTI and Brent crude oil market, prompt month premium has widened to four months high before easing slightly in March.

Brent’s premium over Middle East sour crude benchmark Dubai widens on refined-product shortages on both sides of the Atlantic basin

Moreover, the ICE Brent/JPX Dubai spread also widened to over a three-month high. Similar trend could be observed in the Brent/Dubai EFS spread, a key indicator of Brent’s premium over Middle East sour crude oil benchmark Dubai. Underlying fundamental strength in the spread is driven by distillate fuel oil shortages on both side of the Atlantic basin.

US diesel exports to Europe almost halved in February to 6.65 million barrels compare with January, according to Kpler. The U.S. hasn’t been able to materially boost diesel exports to Europe last month, due to a tight domestic distillate market, too. The lower imports of U.S. diesel have added to Europe’s current struggles to secure distillate volumes, meaning European refiners are likely to be forced to run more crudes in order to meet demand. As Europe is looking to purchase crude that would travel shorter and safer delivery routes, key West African crudes as well as U.S. grade WTI are in high demand in Europe.

At the same time, U.S. refineries are showing signs of returning from maintenance after slumping to their lowest operating rates since December 2022, possibly spurring destock in crude stockpiles and leading to a tightening market ahead.

Reflecting tighter oil market balance of the broader Atlantic basin, Brent/Dubai price spread is expected to remain elevated

Since the inclusion of WTI Midland into the Brent physical market last year, the relationship between US and North Sea crude market has become closer and more stable with WTI setting a floor for Brent and Brent crude oil complex evolves to fully reflect Atlantic Basin light and sweet crude oil market dynamics.  As a result of this, reflecting tighter oil market balance of the broader Atlantic basin, we expect that Brent/Dubai price spread will remain elevated compared with January levels, however, further upward momentum will be capped by sustained OPEC supply cuts.