Dubai oil premium at 2-year high

Middle East crude for immediate delivery traded at its biggest premium in two years to later shipments last month after Royal Dutch Shell bought an unprecedented number of cargoes.

The price gap between the earliest loadings of the benchmark Dubai grade and those for two months later climbed to $2.82 a barrel on November 21, the widest spread since 2011, according to data compiled by Bloomberg. The increase coincided with Shell’s purchase of 12 million barrels last month via the Middle East crude price-setting system conducted by Platts, a unit of McGraw-Hill Financial.

The premium for prompt cargoes, a market structure known as backwardation, influences the level at which Middle East exporters including Saudi Arabian Oil Co set official monthly prices for buyers in Asia, according to industry consultants KBC Energy Economics and JBC Energy. The growing spread shows how deals made in the so-called Platts window, where Shell bought 99 per cent of Dubai oil contracts traded last month, can affect benchmark crude prices.

The buying “increased backwardation and the prompt market is heating up,” said Ehsan Ul Haq, a senior analyst at KBC Energy in Walton-on-Thames, England. “When official selling prices come out, they could be higher than expected.”

Saudi Arabian Oil Co, known as Aramco, will increase January prices for its benchmark Arab Light grade sold to Asia, according to seven buyers at refiners in China, South Korea, Japan and Taiwan in a Bloomberg News survey last week. Six cited rising backwardation as a reason for the gain.

Arab Light for December is set at $3.45 a barrel above the average of benchmark Oman and Dubai crudes. An increase would push that premium to the highest since January 2012. “The Saudis do look at the market structure, particularly toward the end of the month,” said Eugene Lindell, an oil market analyst at JBC Energy in Vienna.

“If they tend to see there is a strengthening backwardation, they will definitely factor that into their choice.”

The monthly change in Aramco’s price differential has trailed a corresponding increase or decrease in the Dubai backwardation in 17 out of 22 months since January 2012, according to data. Front-month Dubai crude in November averaged $2.51 a barrel above prices for the grade two months in the future, according to Bloomberg Fair Value data. That’s up from $1.45 a barrel in October, the data show. The spread between prices was 93 cents a barrel on Monday, the first day of December trading.

Middle East producers, including Saudi Arabia, Iraq, Kuwait and Iran, set prices for their crude as a premium or discount to regional benchmarks and adjust the differentials every month to reflect changes in refining profit margins as well as shifts in supply and demand. The levels are announced a month in advance, meaning Saudi Aramco will issue January prices in December.

Shell bought at least 521 January Dubai partial cargoes in the pricing window last month, according to information from Platts and data compiled by Bloomberg. The only other buyer was China National United Oil Corporation, known as Chinaoil, which purchased seven shipments.

Ross Whittam, a London-based spokesman for Shell, said in a November 27 e-mail that the company declined to comment for this article. Li Runsheng, a spokesman for China National Petroleum Corp, Chinaoil’s parent company in Beijing, didn’t answer two calls to his office.

A total of 552 Dubai partial cargoes traded in November, beating the previous single-month record of 434 in September 2007, according to reports published by Platts.

“It would be fair to say that if there is a lot of buying, that prices should react in response to the purchasing activity,” Jorge Montepeque, the London-based director of global market pricing at Platts, said in an e-mailed response to questions. “But markets are very complex and it should not be forgotten that for every buyer there is also a seller.”

Under the Platts Dubai system, the partial-cargo deals must be combined into one 500,000 barrel shipment when the same buyer and seller trade 20 of the 25,000 barrel lots in a single month.