Middle East Crude Prices Drop as Supply Increases in Asia
Spot premiums for Middle Eastern crude have fallen, with ample supply and reduced refining margins in Asia impacting demand.
Significant Drop in Spot Premiums
This week, spot premiums for Middle Eastern crude benchmarks have plummeted to levels reminiscent of the pre-Iran war period. This decline comes as abundant supplies are weighing heavily on the market, coupled with diminishing refining margins in Asia, which have subsequently cooled buying interest.
Increased Exports Amid Rising Tensions
Middle Eastern producers have notably boosted crude exports during September and October. Analysts from J.P.Morgan have indicated that this increase has led to an oversupply, despite ongoing risks associated with incidents in the Strait of Hormuz. The surge in supply has resulted in the lowest crude premiums since July following an initial agreement aimed at halting the US-Israeli conflict with Iran.
Recent data from Reuters revealed that Dubai's cash premium to swaps experienced a drop to 65 cents per barrel on Monday, its lowest point since July. However, it showed some recovery, reaching $1.55 per barrel by Thursday. Meanwhile, Oman's premium also fell significantly, recorded at 95 cents per barrel on Tuesday before rising to $1.76 on Thursday. These figures reflect a dramatic decline from the average premiums of approximately $8 per barrel seen in the previous month.
Impact of Unsold Cargoes
According to three traders in the market, unsold cargoes of Oman, Murban, and Iraqi crude from the past month's trading cycle have placed additional pressure on spot premiums.
Production and Export Figures
In September, crude exports rose sharply, with the United Arab Emirates' Murban crude reaching a historical high of 2.4 million barrels per day (bpd) before settling at around two million bpd by October. Kpler analyst Naveen Das noted that Murban exports were between 1.2 million and 1.5 million bpd during the early months of the year before the conflict escalated.
Furthermore, UAE's crude production has climbed to over 3.9 million bpd in September, surpassing its pre-war output of 3.4 million bpd. Das pointed out a revision in production estimates for Saudi Arabia, Iraq, and Kuwait as a result of increased loading activities and the depletion of inventories.
Overall, Middle Eastern crude flows, including those via alternative pipelines, averaged 17.1 million bpd in September, decreasing slightly to 16.3 million bpd in October. Notably, Iraqi crude exports jumped to 3.35 million bpd in October, approaching pre-war figures by just 150,000 bpd.
Competitive Market Dynamics
In response to high freight costs, sellers of West African and Brazilian crude have been offering larger discounts to Chinese buyers. This strategy has intensified competition against Gulf grades, as two traders noted. In fact, independent refiners in China's Shandong province recently acquired between 8 million to 10 million barrels of November-loading West African crude.
Looking ahead, Asian refiners appear hesitant to increase crude purchases unless refining margins see an uptick. Last week, China announced a larger-than-anticipated fourth round of fuel export quotas, raising expectations of increased supply in Asia, which has further suppressed refining margins.
Recent LSEG data indicates that profits for gasoline refining have dropped to their lowest levels since late February, while margins for 10-ppm sulphur diesel hover just above $60 per barrel—significantly down from records exceeding $87 per barrel noted in mid-September.