SINGAPORE (Bloomberg) — The relationship between two major oil benchmarks is charting an unexpected course as U.S. sanctions take Iranian crude out of the market.
As demand for alternative Middle Eastern supply increases, regional marker Dubai crude has reason to strengthen. Yet it’s weakening against London’s Brent — an oil grade with very different chemical characteristics that’s used to price barrels from Europe to Africa.
Brent’s gaining more because futures and derivatives linked to it are accessible to an array of financial investors and traders via a highly liquid market, compared with relatively niche over-the-counter and clearing-house platforms for Dubai. So broader concerns over a potential supply crunch are being reflected to a greater extent in the London marker.
“With the disappearance of Iranian oil, Dubai should be stronger but Brent is outperforming,” said John Driscoll, the chief strategist at JTD Energy Services Pte. “Speculators such as funds, index managers, traders and even oil majors could be taking positions in the Brent complex that includes physical and derivative instruments. If you’re going to play big, this is the market to do it.”
Investors’ bullish bets on Brent have risen more than 35% over the past month in the lead up to the U.S. renewal of sanctions on Iran’s crude exports, according to ICE Futures Europe exchange data. Prices are up about 40% in the past year and are near $80/bbl.
While U.S. measures targeting Iranian exports will go into effect only on Nov. 4, the impending restrictions are already succeeding in forcing buyers to curb purchases. That’s creating demand for similar-quality medium- sour crudes, which have a relatively high sulfur content and lower API gravity. Dubai has traditionally been the benchmark for such supply.
The market for high-sulfur oil was already squeezed due to falling output in Venezuela before Iranian exports were threatened. Over the past few months, it’s tightened further after refiners from nations including India, China and Japan cut or halted imports from the Islamic republic and boosted purchases of other Middle East grades.
While near-term Dubai prices have gained, the Middle East benchmark’s advance is being outpaced by Brent — the marker for light-sweet oil with lower sulfur content and higher gravity. The London crude’s premium, as measured by exchange of futures for swaps, has almost doubled to near $3.50/bbl over the last month, according to data from PVM Oil Associates Ltd.
That rising premium has left traders with more to consider when using the EFS to assess the viability of buying and selling cargoes from the Atlantic Basin to Asia.
“Asian refiners rely on the EFS as a key buying signal,” said Driscoll, who has spent more than 30 years in the oil-trading industry. “When the EFS narrows, they load up on the light Brent-based grades. When it blows out, take the heavier Middle Eastern crudes.”
Dubai’s relative weakness is boosting the status of rival Middle East benchmark Oman crude, with pricing for the medium-sour oil increasingly being accepted as an alternative reference. The grade, processed in top refineries in China and India, is traded on a privately negotiated basis as well as on a physically deliverable futures platform on the Dubai Mercantile Exchange.
An Oman cargo for November loading is currently priced at $2/bbl over Dubai, reflecting the strong premiums seen across competing varieties from the Middle East, Russia and Latin America, according to a Bloomberg survey of four traders who participate in the market.
In the first two weeks of September, Iran sold an average 1.6 MMbpd of crude oil, down from 2.5 MMbpd in April, according to Bloomberg tanker tracking. U.S. President Donald Trump in May ripped up a diplomatic deal that Barack Obama negotiated to curtail Tehran’s nuclear program.
Apart from the sanctions, worries over available spare capacity and a surge in profits from producing gasoline and gasoil compared with heavier residual fuels has lifted sentiment for light-sweet oil, which is typically easier to process and turn into lucrative products such as diesel.
“Profits from producing distillates versus fuel oil in Asia have surged, supporting light-sweet Brent crude while weighing on the heavier grades such as Dubai,” said Den Syahril, a Singapore-based senior analyst at industry consultant FGE. “With crude markets as finely balanced as they are now, traders taking large positions in the oil-futures market can cause a pronounced impact and cause wild swings in benchmarks such as Brent.”