Middle East and Asia: Despite the supply tightness, the weaker prices of Middle Eastern medium sour crude so far in June may indicate that oil producers will reduce their OSPs next month. The disconnect between fundamentals and market sentiment arises from bearish forecasts on refining margins and uncertain oil demand in China.
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Middle East and Asia: Bearish margins and uncertain demand keep Mideast oil prices in check
Market sentiment in Asia remains sluggish despite the soon-to-return refining capacity and restrained crude supply. The cash Dubai/Dubai futures spread (Dubai M1/M3 spread) averaged at $0.95/bbl at the time of writing, a sharp decline from the $1.58/bbl average recorded in May, indicating a potential reduction in Middle Eastern sour crude OSPs next month. Moreover, the term price for August-loading Qatari crude al-Shaheen has hit a five-month low of around $1.2/bbl over Dubai, down from $1.82/bbl in the prior month. This price was set after Qatar Energy awarded three al-Shaheen cargoes through its closely watched monthly tender at a price range of $0.80-$1.25/bbl over the underlying Dubai swaps. Even with the drastically slackened prices, al-Shaheen was not the grade setting the physical Dubai benchmark until this Thursday. So far this month, a total of 12 convergences have been made at the Platts’ market-on-close window, of which seven were Oman.
Al-Shaheen term-prices, $/bbl against Dubai
Source: Kpler
At first glance, the weak prices seems contradictory to the improving fundamentals. Medium sour crude supply is expected to remain tight throughout Q3 as the OPEC+ cartel has extended a 2.2 Mbd production cut until September. Additionally, direct crude burns for power generation in Middle Eastern nations are projected to reach their seasonal peak in August at 930 kbd (compared to 694 kbd in May), further reducing crude supply to the international market. On the demand side, around 1.1 Mbd of refining capacity is scheduled to come back online in July in Asia, with an additional 655 kbd to return in August. This timing aligns with anticipated strong transportation fuel demand during the summer travel frenzy.
The disconnect between fundamental outlooks – even though the market is trading the August-loading Middle Eastern cargoes this month – and current market sentiment may stem from weakening refining margins and growing concerns over demand in China. Several refineries in South Korea, Thailand, Taiwan, and China reportedly scaled back operations due to slumping margins since February, with only modest recoveries observed this month. However, this renewed strength may be fleeting, especially for diesel in Asia, given the projected supply surplus.
Deciphering demand in China has always been like reading a crystal ball. Recent data, however, does not paint a rosy picture. The nation's non-SPR crude oil inventories bounced back in June to around 686 Mbbls after a brief dip in late May. While this stockpiling might be seen as preparation for the completion of refinery maintenance in July, it also signals a concerning drop in refining activity, as some state-owned refineries have tuned down their run rates this month. That being said, we should get a clearer picture of Chinese inventories in the coming weeks. However, if we consider the volume of crude oil currently in transit to China, the situation appears rather dire. Our data shows about 257 Mbbls of crude are en route to China, a decline of 106 Mbbls compared to two months ago, marking the lowest level in more than five years – this is even significantly lower than in H1 2020 when the COVID-19 outbreak severely dampened oil demand and clogged supply chain. This indicates that Chinese refiners were, and may still be, purchasing less crude. As mentioned in previous reports, Chinese refiners will significantly reduce their intake of Saudi crude in June and July. Now, with August-loading Russian ESPO crude on the table, a few July cargoes are still awaiting clearance. This light sweet crude is trading at a discount of about $0.80/bbl against ICE Brent on a DES basis in China, down from near Brent parity two months ago.
Crude/co in transit to China, Mbbls
Source: Kpler
Chinese refiners snapped up a substantial amount of May- and June-loading West African (WAF) cargoes as weak demand from Europe risked a supply overhang and pressured prices. However, this pattern is unlikely to repeat this month as Dated Brent, to which WAF is pegged, has surged alongside the return of European appetite. The widening Brent/Dubai spread will redirect the attention of Chinese and other Asian refiners back to Middle Eastern crude, providing more support to the Dubai structure.
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