Please respect FT.com's ts&cs and copyright policy which allow you to: share links; copy content for personal use; & redistribute limited extracts. Email ftsales.support@ft.com to buy additional rights or use this link to reference the article - http://www.ft.com/cms/s/0/7422d582-a151-11e0-baa8-00144feabdc0.html#ixzz1QYLbU5cE
The release of the Western countries’ petroleum strategic stocks has triggered significant disruption to one of the most popular relative-value trades among physical oil traders: the price differential between Brent crude and Dubai crude.
The spread between lower quality, heavy sour Dubai crude, the benchmark for Middle East supplies, and premium quality, light sweet Brent, has narrowed to a 6-month low as the International Energy Agency floods the market with light, sweet oil.
More
ON THIS STORY
IEA makes bold move to lower oil prices
Crude at lowest since Libya crisis began
Oil reserves release shocks markets
White House taps reserves with eye on votes
Lex Bernanke and the IEA
The so-called Brent-Dubai exchange of futures for swaps, or EFS, touched a session high of $9.20 a barrel on June 15, the highest intraday value since October 2004, as traders bet that Saudi Arabia would boost production to a three-decade high of 10m barrels a day, flooding the market with heavy, sour crude of similar value to Dubai.
At the same time, supplies of crude similar to Brent were tight due to the loss of output from Libya, widening the spread. The North African country produced before disruption about 1.6m b/d of light, sweet oil. But the conflict has cut output to 200,000 b/d.
As refiners sough substitutes for Libya’s top quality oil, they drove up Brent prices.
Demand for light, sweet oil usually increases during the spring and early summer ahead of the so-called driving season, when petrol consumption rises.
The outlook made the Brent-Dubai EFS a favourite of the physical oil traders and the energy-focused hedge fund community. Oil traders, who moved into it after Riyadh announced its production boost earlier this month, were last week caught wrong footed by the IEA’s release of its strategic reserves. As they unwound their positions, the spread plunged on Monday to $3.30 a barrel, a nearly 65 per cent drop in two weeks.
That has left the oil trading industry reeling, with talk about some heavy losses. Energy-focused hedge funds have also been hit.
The collapse of the spread is the clearest sign yet that the release of the strategic stocks is working, easing the tightness of the European oil market triggered by the supply losses from Libya. Soozhana Choi, oil analyst at Deutsche Bank, estimates that about 80 per cent of Libyan oil exports went to European countries.
