SG:Dubai crude close to Brent on Iran fears and Asia appetite
Gulf News reported that Dubai Middle East crudes are rallying from the lowest level in four months relative to Brent oil as Asian demand for the region's grades increases and Western sanctions on Iran tighten supply.
According to data from London based broker PVM Oil Associates Limited, Dubai crude, the benchmark for Asia that started the month at the widest discount to North Sea Brent oil since November 10, is now closing the gap. The Dubai front month swap was USD 3.42 per barrel below Brent futures at Tuesday's close compared with USD 4.56 on March 1st 2012. The spread will probably narrow further.
Asian refiners are adding capacity and upgrading plants to use more oil grades from the Arabian Gulf that are heavier and cheaper than Brent, just as Western sanctions on Iran threaten to disrupt supply. Companies such as Royal Dutch Shell are shutting European refineries amid shrinking profits, curbing demand for lighter crudes and investing in plants in China.
Mr Seth Kleinman head of global energy research at Citigroup in London said that "You're seeing a multiyear trend of the narrowing of the Brent Dubai. You're seeing a massive shift of refining capacity out of the Atlantic Basin to Asia. The tightness has switch to Dubai as the loss of Iranian barrels boosts prices for other Middle East grades.ā€¯
The gap between the two regional benchmarks, also known as the exchange of futures for swaps narrowed to as little as USD 2.41 on January 13th 2012 as investors bet that sanctions against Iran's nuclear program would boost competition for Mideast oil supplies, according to PVM data tracking Brent on the ICE Futures Europe exchange and Dubai swaps in the brokered market. April Brent was at USD 125.95 per barrel yesterday.
The EFS widened to USD 4.75 by March 1st 2012 as Dubai fell in value relative to Brent after reports that China had settled a disagreement on crude purchases from Iran relieving an anticipated clamor for other types of Mideast oil such as Dubai.
According to JBC Energy, the spread has shrunk 29% since then to USD 3.35 signalling Dubai crude gaining on Brent again a trend that will continue because refining capacity is being slashed in Europe and added in Asia.
Mr Eugene Lindell an analyst at JBC in Vienna said that the newest Asian refineries are typically designed to use oil that's relatively heavy and high in sulfur or sour strengthening demand for grades similar to Dubai. The spreads are going to be narrow.
He said that we have massive refinery capacity additions, mostly in India and China and the feedstock for these is going to be your medium sour or heavier grades. In the Atlantic Basin you have refiners dropping off and these typically process the lighter grades.
