Unexpected drop in Middle East oil premiums raises Saudi pricing dilemma

Spot premiums for Middle East crude oil unexpectedly slumped at the end of September despite stockpiling demand from top importer China, as there were ample supplies in Asia from Russia, and producers in the Gulf and other regions, traders said.

The sudden weakness in benchmarks – Dubai, Oman and Murban – could put Saudi Arabia in a quandary, they said, as the world’s top exporter is expected to raise official selling prices next month for November-loading supplies to Asia.

A total of 39 cargoes, or 19.5 million barrels of crude, were delivered via trades during the S&P Global Platts Market on Close process that assesses the Dubai benchmark, a tally by Reuters based on trade data as of Monday showed.

Trading firms Vitol, Gunvor, PetroChina and North Petroleum International snapped up the cargoes, traders said, keeping spot premiums for benchmark Dubai firmly above $3 in the first half of this month. Dubai’s premium hit a six-month high of $3.63 a barrel in mid-September.

Concerns about disruption in Russian oil exports from Ukrainian drone attacks and possible US sanctions provided support for the market, in addition to China’s oil stockpiling demand, they said.

Top seller Mercuria

Trading house Mercuria emerged as the key seller during the MoC process this month. The European trader sold 36 cargoes, including one Oman crude, two Qatari al-Shaheen crude while the rest are Abu Dhabi’s Upper Zakum grade, trade data obtained by Reuters showed.

Mercuria delivered more Upper Zakum crude than was available in the spot market as it bought some cargoes from Asian refiners including Formosa Petrochemical 6505.TW and Bharat Petroleum Corp Ltd BPCL.NS, three of the sources said.

Cash Dubai premiums slumped to 88 cents on Monday, losing more than two-third of its value in the past three sessions, Reuters data showed.

One of the sources said there are many unsold November-loading cargoes available in the market, mostly Upper Zakum crude. Another said Russia is exporting more crude as its refineries were damaged by Ukrainian drones.

There are also plenty of cargoes from producers in other regions such as Brazil and Europe, traders said. The arbitrage had opened when dated Brent slipped to an unusually wide discount of $3 a barrel against Dubai, they added. Low-sulphur Brent crude is typically priced at a premium to high-sulphur Dubai.

“Come late-October/early-November, we see Asia starting to feel bloated by the surge of inbound Atlantic Basin arb flows,” analysts at consultancy FGE said in a note.

“With Asia’s appetite for crude waning and as the circa 2 million barrels per day global oil surplus starts to materialise in stocks, we see contango creeping into the market.”

Contango refers to the market structure where prompt prices are lower than those in future months, indicating comfortable supplies.