By Eesha Muneeb
Production cuts from Oman and rising crude imports from Chinese independent refiners could be partially responsible for the widening spread between Dubai Mercantile Exchange’s Oman futures contract and other key Middle East market indicators this month, S&P Global Platts data showed Monday.
The DME Oman marker exceeded its previous record high against Platts M1 Cash Dubai, averaging $4.94/b to-date in May, while posting similar increments against Platts M1 Cash Oman and the front-month ICE Brent futures contract over the same time period.
In April, the DME Oman’s premium over Platts Cash Dubai had averaged $3.27/b, then the widest spread between the two Middle East markers since averaging $1.81/b in July 2008, Platts data showed.
To-date in May, the DME Oman contract hit a premium of $4.41/b against Platts July Cash Oman. This had been $3.17/b over April, Platts data showed.
The spread between the DME Oman contract versus ICE Brent futures flipped into premium in May, averaging $1.37/b over July ICE Brent futures at the 0830 GMT Asian close, the data showed. In April, this spread had averaged a discount of minus $2.80/b.
“Oman had a period where the value was irrationally high — didn’t move with the rest of the market,” a Singapore-based crude trader said.
The contract’s premium stands out in the wider Asian market due to a combination of specific fundamentals, namely deep supply-side production cuts from Oman and rising import demand from China.
Following fresh OPEC+ production cut quotas set to take effect from May, Oman said it would cut oil production from its six largest producing blocks by 23 per cent from their October 2018 baseline levels of 883,000 b/d to adhere with the OPEC+ production cuts coming into effect for May and June.
The drop is equivalent to Oman cutting 201,000 b/d for the two months, with a production quota of 682,000 b/d. Under the previous OPEC+ agreement that expired in March, Oman’s quota was 961,000 b/d. Oman is the largest producer in the Arabian Gulf that is not a member of OPEC. It is, however, a member of the OPEC+ alliance.
Oman’s chunky production cut is likely to have an acute impact on the price of the crude in China, since more than 70 per cent of the grade flows into the North Asian nation in any given month. China’s dependence on Oman has grown in recent months, as other Asian nations have reduced their import of the grade in line with reduced oil demand due to the COVID-19 pandemic.
China’s share of Oman Blend exports, which averaged 738,106 b/d in March, rose to 92 per cent during the month, from 90 per cent in February, according to the latest data from Oman’s Oil and Gas Ministry.
At the same time, Chinese independent refiners’ crude imports have continued to tick higher as buyers take advantage of low crude oil prices in the global market, while being guaranteed a floor price for its oil products domestically.
“Demand into China seems fairly robust now, with new quotas and domestic pricing, they have rushed to buy what they are used to, for example, Oman and ESPO etc,” the Singapore-based crude trader said.
Crude imports by China’s independent refineries rebounded 8.3 per cent to 13.19 million mt in April, or 3.22 million b/d, from 12.2 million mt in March, with Shandong independent refineries booking more cargoes last month, an S&P Global Platts monthly survey published last Friday showed.
The uptick in crude demand from Chinese independents come even as refining margins for products such as diesel and jet continue to slide. This is possible due to China’s domestic floor pricing mechanism, which sets the price of oil products at a minimum baseline of $40/b and forms part of the government’s measures to support the domestic refining industry.
“Will China keep buying? Yes, as long as flat price is low, they will, but they will only buy certain grades like Oman, Lula and ESPO,” a second trader said.
Meanwhile, other major crude importing nations in Asia have had little choice but to pull back from making incremental crude purchases despite attractive prices, Platts data showed.
Japan’s crude throughput slid 8.4 per cent week on week to 2.47 million b/d over April 19-25, with major Japanese refiners cutting down operations, data from the Petroleum Association of Japan at the end of April showed. This was down 21.6 per cent year on year, Platts data showed. Refinery utilization also continues to slide, standing at roughly 70 per cent as of April 25, according to the PAJ data.
Similarly, South Korea’s crude imports fell 3.5 per cent from a year ago in March due to weak demand for refined oil products in the wake of the coronavirus pandemic, data released by state-run Korea National Oil Corp. showed at the end of April.
[Courtesy: S&P Global Platts]