Middle East crude differentials slump to three-year lows, Oman overhang  

Quantum Commodity Intelligence – Differentials for flagship medium sour grades loading in the Middle East during February have slumped to the lowest levels for three years, amid concerns over excess supplies during Q1, despite OPEC+ announcing further cuts for January.

Flagship tradeable spot grades including Oman, Upper Zakum and Al Shaheen were all marked at a discount to the underlying Dubai swap with Oman seen as the lowest at around a -$0.50/b, according to Quantum data Thursday.

This is the first time that the Middle East marker grades have moved into discount since the fourth quarter of 2020.

The three flagship grades make up the core of the 'Dubai basket' crudes, while light sweet Murban, which is also part of the Dubai benchmark, was also seen at a small discount to Dubai swaps.   

Fundamentally the demand outlook remains uncertain, while the Middle East faces stiff competition from arbitrage barrels from the Atlantic Basin, with the lowest Brent/Dubai EFS levels in three years making Dated-Brent priced imports cheaper for Asian refiners.

Middle East grades have attracted healthy premiums to the underlying Dubai swap since the world emerged from the 2020 pandemic, peaking at record highs of more than +$10/b in the wake of Russia's invasion of Ukraine and initial fears over a sharp slump in Russian exports.

Ultimately Russian Urals, which is a similar quality to Oman, was largely re-routed to India and despite the additional competition, Middle East medium sour grades have held at comfortable premiums over the Dubai swap prior to this month.  

Overhang

The prompt overhang was exacerbated by a delay in maintenance on Oman's Sohar refinery, which so far has seen the Oman Ministry of Oil and Gas (MOG) selling up to 3 million barrels of ultra-prompt December-loading crude.

Although a relatively small volume in the broader scheme of things, it still added to the negative sentiment surrounding the spot market.

Sources said prompt Murban had also been resold due to ongoing maintenance at the Adnoc's giant Ruwais refiner, also adding to the overhang. 

The weakness in the prompt market has also been reflected in the structure as the M1/M3 (Feb24/Apr24) Dubai cash spread flipped into contango this week, having averaged around +$0.50/b prior to Tuesday.

This was also the first time the market has been in contango outside of expiry-linked volatility since November 2020, although discounts in the physical market become self-fulfilling with a contango structure given the pricing formula for most Middle East spot and term barrels.

Cargoes typically price the month of loading against the front-line Dubai assessment, which reflects cargo loading two months forward, so the structure is built into the pricing formula.

Traders said that the discounts look to be temporary with markets seen returning to backwardation and premiums restored, although likely at below +$1/b for at least the short-term.

OPEC+ members have pledged additional voluntary cuts of 900,000 bpd from January, of which 700,000 bpd is crude oil along with 200,000 bpd of Russian diesel. Most of the crude cuts are from Middle East producers.