Dubai crude up over 5% on week as OPEC mulls production cut

Quantum Commodity Intelligence - Middle East benchmark Dubai crude oil finished the week ending 26 August over 5% higher, as East of Suez markets continued to recover from the six-month lows seen in the previous week.

Prices had been edging up from the previous week's six-month low of just above $90/b but rallied sharply after comments late Monday by Saudi Energy Minister Prince Abdulaziz bin Salman, indicating that the Kingdom would consider production cuts due to what he said was a disconnect between futures and fundamentals.

Markets stabilised in the latter part of the week after the latest EIA data showed a slowdown in US gasoline demand, while potential progress on Iranian nuclear talks dampened sentiment.

However, the rally resumed on reports that momentum was building among OPEC members for a cut in crude production to stabilise markets, with a host of producer countries backing the Saudi comments, including key players such as the EUA and Iraq.  

OPEC's rotating president also told the Wall Street Journal Thursday that the Saudi energy minister's proposal to consider a reduction in light of market volatility was "in line with our views and objectives."

Front-month Dubai cash for October delivery was assessed by Quantum on 26 August at $99.65/b versus $94.35/b on 19 August, up 5.6% on the week.

However, Middle East producers continue to face competition from cheap Russian barrels, including reports of steep discounts on offer for term contracts as Moscow looks to evade tightening sanctions and potential price caps on energy exports.

Additionally, this month's sharp contraction in the Brent/Dubai EFS has opened up previously-closed arbitrage routes, but this is having more impact on lighter grades amid a sharp increase of flows from the Atlantic Basin into Asia.

Structure

The prompt Dubai structure softened as the M1/M3 (Oc22/Dec22), used by National Oil Companies in OSP calculations, retreated to under $4/b this week before rebounding to around $4.70/b on Friday, compared to $4.35/b for the same spread on 19 August.

The M1/M3 is less than half where it was at the same stage last month, warranting a sharp reduction in Saudi OSPs, which some traders say could be in the region of $5/b.

ICE Brent futures for Oct22 were pegged at $99.82/b at the Asia close Friday (1630pm Singapore), up $4.32/b on the week, or 4.5%, narrowing the Brent/Dubai cash spread for October to just $0.17/b versus $1.15/b on the same spread a week ago and the lowest in nearly two years.

The October Brent/Dubai EFS was down around $0.70/b on the week, trading around $4.85/b on Friday's Asia close. 

DME Oman futures at 1630 Singapore time were 4.7% higher at $99.52/b for the Oct22 contract, largely converging with cash Dubai.

Light sweet Murban crude futures trading on Abu Dhabi's IFAD were also up 4.7% to close the week at $100.84/b for Oct22, holding a premium of around $1/b over Brent.