Dubai crude oil backwardation crunches amid demand slowdown fears
Quantum Commodity Intelligence - Benchmark Dubai crude oil price sunk below $100/b this week for the first time since 15 July, but perhaps more alarming for Middle East producers has been the sharp contraction in the structure, which is usually a precursor for weaker oil demand or at least, an easing in supply/demand fundamentals.
The key M1/M3 (Oct/22/Dec22) Dubai structure has retreated to under $6/b this week for the first time since May, while the corresponding M1/M3 spread for the second half of last month was comfortably above $9/b, according to Quantum data.
The M1/M3 Dubai cash spread is closely monitored by Saudi Aramco and other Middle East National Oil Companies (NOCs), as it is used as a key metric for setting Official Selling Prices (OSPs), while spot premiums for flagship Middle East medium sour grades such as Oman, Upper Zakum and Al Shaheen typically reflect the M1/M3 spread.
The weaker market structure has also been felt along the forward curve as the one-year Dubai spread narrowed to the lowest point since April on Wednesday, valued at $13.36/b by Quantum.
Dubai backwardation had been at elevated levels since Russia's invasion of neighbouring Ukraine. In the immediate aftermath, the M1/M3 spread ballooned to a record $15.55/b on 3 March, while the 12-month spread also hit an all-time high of $32.17/b on the same day.
Dubai cash for October delivery was assessed by Quantum at $98.36/b on Wednesday.
Crunch
The crunch in spreads came amid fears of a demand slowdown as China's recovery remains fragile, with the latest data highlighting the nation's stop-start economic recovery as ongoing Covid restrictions hamper growth.
China's factory activity unexpectedly retreated in July, despite recent increasing signs of moderate recovery in the world's No 2 economy. The official manufacturing purchasing managers' index (PMI) slid from 50.2 in June to 49 this month, well below the 50-mark that indicates a contraction in activity.
At the same time, Brent spreads have also crunched sharply, with the M1/M2 spread sinking below $2/b for the first time since May.
The 12-month curve has also contracted, valued by Quantum at just above $10/b on Wednesday's Asia close, down by over $6.50/b week-on-week, albeit when Sep22 was still the front-line Brent contract last Wednesday.
Oil markets have also felt the after-effects of last week's bearish outlook for the US economy as the broader focus remains on risks to demand from recessionary fears, which some analysts say look increasingly probable.
"Oil traders remain laser-focused on global macro data, particularly concerning the two largest oil-consuming economies in the world, the USA and China," said Stephen Innes, managing partner SPI Asset Management.
