Middle Eastern oil is flavour of the month as benchmarks diverge

Crudes from the Middle East are off to a strong start this month as a major divergence in global benchmarks favours grades priced off Dubai oil, highlighting strong global demand at a time of surging prices.

Oman crude for loading in April was pegged at about $4 a barrel over Dubai prices, according to Bloomberg estimates. That’s up from late last month, when premiums averaged about $2.70. Interest in Dubai-linked cargoes has risen given their discount to benchmarks such as Brent and West Texas Intermediate, which most European and American grades are priced off, traders said.

Oil futures have soared to the highest level in seven years in the opening weeks of 2022, building on last year’s rally, as energy consumption recovers from the impact of the pandemic. In mid-December Brent, the most important global oil benchmark, was about $2.50 barrel more expensive than Dubai crude swaps; now that’s expanded to more than $4.50. The widening differential offers Middle Eastern crudes an edge in increasingly buoyant market.

The same market forces that have lifted futures have also boosted the price of near-term barrels relative to later-dated ones, a bullish pattern known as backwardation. That too works to the advantage of suppliers from the Middle East seeking sales in Asia given the shorter distances that need to be covered.

Arbitrage flows of WTI Midland, for example, are now less attractive to Asian buyers due to the steep backwardation, traders said. Long-haul cargoes from North America or the North Sea take close to two months to sail to Asia and are less attractive for sellers than prompt sales to customers who are closer.

Asian oil traders also cited healthy refining margins for gasoline and gasoil, and their impact on lifting overall processing profits and possibly run rates among regional refiners. Global fuel prices are rising faster than the recovery in crude, with everything from motor to industrial fuel jumping as economies and borders reopen, coupled with lower product exports from China.