LAUNCESTON, Australia (Reuters) - With the price of Brent crude back below where it was before last month’s attacks on Saudi Arabia’s oil infrastructure, it’s tempting to think normal service has been resumed and the market can once again focus on concerns about the outlook for demand.
However, while Brent futures are signalling that the investor market has moved on from the heightened geopolitical risks in the wake of the Sept. 14 attacks, there are still some lingering effects in the pricing of Middle Eastern crudes.
The most obvious sign is that Oman crude futures on the Dubai Mercantile Exchange (DME) are trading at a premium to Brent futures, a reversal from the situation prior to the missile and drone strikes.
The DME contract ended at $58.75 a barrel on Oct. 4, while Brent finished the day at $58.37.
A premium of 38 cents doesn’t sound like much. But it’s worth noting that Oman futures generally trade at a discount to Brent, reflecting the difference in the quality of the underlying crude grades.
Oman has an API gravity of 34 degrees, which makes it on the heavier side of light crudes, while Brent at 38.3 degrees is the global light crude benchmark.
But the main difference between the two grades is the sulphur content, with Oman a sour crude at 2% while Brent is sweet at just 0.37%.
In theory, the lighter and sweeter crude should be more valuable as it’s easier and cheaper for refiners to process into fuels and yields less high-sulphur residual fuel oil.
This should especially be the case as the implementation of new shipping rules, known as IMO 2020, draws closer.
Refiners will want to minimise the amount of high-sulphur fuel oil they produce as ships will largely be banned from using such fuel from next year, unless they have been fitted with scrubbers to remove the sulphur after combustion.
The current premium of Oman futures over their Brent equivalents is also a reversal of the situation prior to the attacks on Saudi Arabia’s Abqaiq and the Khurais oil plants, which shut down about 5.7 million barrels per day (bpd) of production in the world’s largest crude exporter.
At close on Sept. 13, Brent futures were at $60.22 a barrel and Oman at $59.35, a premium of 87 cents.
Saudi Arabia has stated that it has now restored full production, and that it was able to maintain supplies to customers by using inventories and switching grades.
This would imply that the crisis sparked by the attacks is over, and the reversal of Brent’s 15% price spike shows that the investor market is in agreement that the Saudis have the situation under control.
But the swing from a discount to a premium for the main Middle East futures contract suggests that not all participants in the market are convinced. It’s also a sign that the physical market is probably tighter than what’s implied by the current pricing of Brent futures.
Another factor that supports the view that the physical market for Middle East crudes is somewhat tight is Saudi Aramco’s move to raise the official selling prices (OSPs) for its crude grades for November delivery to refiners in Asia, the major buyers of its oil.
The state-owned oil company increased the OSP for its benchmark Arab Light crude to a premium of $3 a barrel over the average of Oman/Dubai prices for November, from a premium of $2.30 for October cargoes.
In effect this is a double-whammy for Asian refiners. They are paying an increased OSP premium, added to the Oman/Dubai price, which is already higher on a relative basis to Brent crude.
The only positive for Asian refiners is that the situation may ease in coming months, with Oman and Brent crude futures that expire at the end of December showing Brent back trading at a premium to Oman.
The December Brent contract ended at $57.23 a barrel on Oct. 4, while the DME contract for the same month finished at $56.32.
This implies that traders expect any tightness in Middle East crudes in the next few months to start easing, even though refiners are having to pay relatively more for prompt supplies.
Editing by Kenneth Maxwell