Oil buyers in Asia are increasingly turning to heavy sour crude oil grades from the Middle East, whose values have increased relative to light sweet crudes as a result.
There has been unique demand destruction in energy markets this year due to the coronavirus pandemic, with S&P Global Platts Analytics forecasting that consumption will drop by 8.5 million barrels per day this year, leaving the global Dated Brent oil price in the upper $30s to lower $40s a barrel range.
However, crude grades are not homogenous and there are hundreds of different types, each with their own qualities and characteristics.
Typically, the value of a grade of crude oil is defined by the underlying value of the products that are made when it is refined. The refinery yields of different crude grades and underlying refinery economics are critical in analysing the competitiveness of competing crudes in major consumer markets such as Asia.
The international market has settled on using certain benchmarks, against which the value of crudes is measured.
Values for Platts Dubai, the Middle East sour crude benchmark assessment, have been supported in recent weeks by the ongoing tightness in the sour crude complex.
Platts Dubai rose to a premium of 1 cent a barrel to Cash Brent at market close in Singapore on November 9. This means that the market is valuing sour Middle Eastern crude above North Sea sweet crude, which the Brent benchmark reflects.
By contrast, Platts Dubai was last year assessed at a discount of 74 cents a barrel to Cash Brent at the average Singapore close.
The market has registered a combination of strong interest from Asian refiners interested in purchasing crude – buoyed by a resurgence in the region’s key economies, especially India and China – and production cuts from the Opec+ group.
Chinese demand has been particularly strong for Middle East sour crude grades, with barrels of Abu Dhabi’s Upper Zakum, Qatar’s Al Shaheen and Oman’s crude export blend – all deliverable crudes into the Platts Dubai benchmark – recently purchased by the world’s largest importer of crude oil.
By way of example, China’s independent Rongsheng refinery is set to expand its refinery capacity and it has been buying crude cargoes ahead of this.
In addition, demand from Indian refiners for Middle East crude has picked up against a backdrop of improving domestic petrol margins.
Opec and its members have complied with their production cuts in recent months, with some countries even cutting back extra barrels as they must compensate for previous overproduction.
The most recent Platts Opec+ survey for October shows that the group’s 10 non-Opec alliance members produced 34.4 million bpd in October, reflecting 100.2 per cent compliance with their quotas.
Meanwhile, western benchmarks – Brent and WTI – remain under pressure from poor refining margins, linked to weak refined product demand due to the current lockdowns and reduced movement across the Western Hemisphere.
In Europe, a second round of lockdowns after a rise in the number of coronavirus cases across much of the continent in October and November sent further shockwaves through crude markets. However, the consequences on fundamentals have been notably different from those registered earlier this year.
This is mainly because of a rise in demand from Chinese and Indian refiners, who consider a mix of West African and Mediterranean sweet crudes to be options that are more economically viable.
While values for the Platts Dated Brent benchmark have found some support after positive reports on coronavirus vaccine trials, prices remain fundamentally weak as oil product demand remains stuck on the back foot.
Oil markets are still vulnerable. On a net basis, Platts Analytics projects that oil demand in 2021 will be lower than it was last year.
However, there will be winners and losers, and the premium of Platts Dubai to other major oil benchmarks highlights the extent to which heavier sourer grades of crude from the Middle East face strong demand from buyers in Asia in a two-tier recovery.
Dan Colover is head of Middle East Structured Market Engagement at S&P Global Platts
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