-- Robert Campbell is a Reuters market analyst. The views
expressed are his own. --
By Robert Campbell
NEW YORK Dec 5 The roaring bull run in Asian
crude oil markets has been brought to a screeching halt by
arbitrage players but traders would be remiss not to keep one
eye on the Dubai screen for signs of another flare-up.
The gap between Asian benchmark Dubai swaps and Brent crude
futures has tumbled to a one-year low near $3 a barrel,
completing the unwinding of the blowout in the spread caused by
the Libyan civil war. (See Chart 1)
Not surprisingly the relative weakness in Atlantic basin
crude markets has prompted some arbitrage players to move
cargoes east in a rare and risky trade.
In the best known trade, oil major BP (BP.L) is believed to
be taking 2 million barrels of North Sea benchmark Forties
crude to South Korea. Total (TOTF.PA) is also believed to be
moving another 2 million barrels east. [ID:nL4E7N12A0]
Market participants say other companies, including Chinese
firms, have been moving oil to Asia, including Russia's light
sour Urals crude, which has shown unprecedented strength
against the Dated Brent benchmark in recent weeks.
In any arbitrage trade, there are two sides to the coin. So
what is the driver here? Is it relatively weak European demand
and improved supply with Libya coming back?
Perhaps. Certainly European refiners, already battling very
weak gasoline prices, will be hammered by the sudden tightening
of regional supply caused by the arbitrage flows, given the
limited amount of short-haul European crude that is on offer at
any moment. [ID:nL5E7N12L7]
But there is also the Asian side of the equation. The
backwardation in the Dubai swaps market soared last week to
multi-year highs, suggesting, at least in the short term, a
very tight market east of Suez.
Arbitrage flows have dented this backwardation but even at
today's levels the market is signaling for prompt crude
supplies. (See Chart 2).
Chart 1: Dubai-Brent spread: r.reuters.com/dem45s
Chart 2: Dubai timespread: r.reuters.com/bem45s
The final leg in the tightening of Dubai timespreads
started off in early November, coinciding with the return of
tensions between the West and Iran over Tehran's nuclear
So have Asian refiners been scrambling for alternatives to
Iranian crude as a hedge against possible military conflict?
That may well be the case.
Cheap tanker rates owing to an oversupply of long-range
vessels are helping the crude oil flows, as well as strong fuel
oil prices which encourage simple refineries to maximize runs.
But the rally seems to be driven mostly by crude oil market
dynamics rather than product flows. Middle distillates, in
particular, do not seem to be racing ahead.
Distillate cracks in Asia have fallen since October,
knocked lower in part by China staying out of the spot market
and relying on its expanding refineries to meet domestic diesel
fuel demand. [ID:nL4E7MT1T1]
A lack of demand from Europe for Asian diesel fuel is
further helping to keep the Singapore distillates market
So a case for this being a crude oil driven rally can be
made. Given Asia's heavy reliance on crude oil imports from the
Middle East which could be threatened by military action
against Iran, a bit of urgency in crude buying should not come
as a surprise.
If so, some of the new buying may be for crude oil
stockpiles and not immediate consumption. But this is hard to
tell given the paucity of data on Asian oil stockpiles.
But in any case, to peg this as a one-off rally following
an escalation of tensions with Iran ignores the steady
tightening of Dubai timespreads over the last several months.
Some 1.8 million barrels per day of net new refining
capacity is due to start up next year, most of which will be in
Asia. A series of closures in Europe and the United States will
further amplify the impact of these new plants on crude flows.
The simple fact is that the market for crude oil is growing
fastest in Asia as the overall market shifts eastward.
Soft demand in the Atlantic basin due to economic weakness
in Europe and the Americas will more than likely materialize in
the form of lower crude runs in Europe. And in turn that could
lead to more crude arbitrage east.
(Editing by Marguerita Choy)