Dubai crude market structure hits two-month high, demand seen improving

London (Quantum Commodity Intelligence) – The Dubai cash first-line versus second line (Jul vs Aug) spread moved to a 17-month high of $0.75/b Monday in a sign that the Middle East sour market is tightening in the summer months as backwardation widens, according to Quantum data and trading sources.

Likewise, the M1 vs M3 (Jul vs Sep) cash spread hit a two-month high of $1.35/b, signaling the backwardation is also strengthening along the curve.

The M1 vs M3 spread is closely watched by National Oil Companies, who use the spread as a measure of market strength ahead of publishing Official Selling Prices.

This spread also measures Dubai cash vs Dubai swaps, which is a key instrument for physical traders as Middle East cargoes are typically traded as a differential to the swap – a wide cash/swap spread signaling a higher premium for spot cargoes, which in turn signals improved demand.

Market recovers from weak June expiry

Following a weak expiry of the June Dubai contract in late April, when the M1/M2 spread narrowed to around parity, spreads have widened with the new Jul/Aug spread averaging $0.52/b so far in May, prior to Monday.

The Dubai structure also strengthened along the forward curve, according to broker data, again suggesting the market is factoring in a supply/demand imbalance moving into the 2H of 2021 – with supply outstripping demand.

Dubai crude pricing above $65/b and a strengthening forward curve will be viewed as an endorsement of the OPEC+ policy of gradually releasing barrels into the market, rather than creating an oversupply before demand has had time to sufficiently recover.

Quantum assessed Dubai for July delivery at $67.13/b on May 17 (1630 Singapore time), up $1.83/b from Friday's Singapore close, with French trader Totsa seen in the market for July-loading Middle East crude.