Middle East crudes are likely to face continued competition from Western arbitrage barrels, as the Brent/Dubai Exchange of Futures for Swaps fell to a 19-month low of 96 cents/b on Thursday, traders said.

The EFS spread — a key indicator of ICE Brent’s premium to benchmark cash Dubai — has been narrowing sharply this year, as the OPEC cuts have tightened supply of Middle Eastern medium, heavy sour grades, thereby raising their value against light sweet crudes in Northern Europe.

The second-month EFS on Thursday was the lowest since August 31, 2015, when it was assessed at 95 cents/b, S&P Global Platts data showed.

The EFS averaged at $1.26/b in April to-date, compared to the $1.33/b average in March — which was the lowest since August 2015, when it averaged at 79 cents/b, the data showed.

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“Brent spreads are also coming off [and at the same time] Dubai inter-months spreads are also weaker. It looks like there is room [for the EFS] to come down more,” said a Singapore-based crude trader.

The narrowing EFS, coupled with inexpensive West-East freights, have made Dubai-linked grades less competitive against Brent-linked grades, resulting in an influx of Atlantic Basin crudes to Asia.

Earlier this week, Platts reported that as many as seven VLCCs are expected to move Brent, Forties and Ekofisk cargoes to the Far East in April, which will primarily consist of Forties and Ekofisk for Unipec, Shell, and Glencore.

Light sour Middle East crude grades, especially, have faced the brunt of the competition from the West, with traders expecting grades such as Abu Dhabi’s Murban to remain under pressure amid ample availability of crudes from both within and outside the region.

On the Platts Market on Close assessment process on Thursday, a cash Murban crude partial was offered and traded — the second time, ever, to be traded during the MOC process.

Shell bought one June cash Murban partial from China’s Unipec at $56.40/b during the MOC process on Thursday.

“[Sentiment for the] lights is still bearish, [and it] should trade in discounts [to their respective official selling prices this month],” said a North Asian crude trader.

Reflecting the weaker sentiment in the Middle East crude market, frontline Dubai cash fell to a two-weeks low against same-month Dubai swap, Thursday.

The spread between June cash Dubai and June Dubai swaps was assessed at minus 77 cents/b Thursday — the lowest since March 31, when it was assessed at a discount of 87 cents/b.

MIDDLE EAST FREIGHT RISING

Meanwhile, worldscale rates for VLCCs are sharply on the rise as demand for loadings later this month and in early May is supporting the market, tanker brokers across Asia said.

“The market is trying to recover now,” said a VLCC broker in New Delhi. “The market is firming, as the tonnage list is balanced,” added a broker in Tokyo.

VLCCs typically carry upto two million barrels of crude each.

The loading program for April in the Middle East has already exceeded that of the previous month, with 131 VLCC cargoes covered with tonnage in the region — including both for deliveries in the East and West, up from 125 in March, according to shipping industry estimates.

As charterers race ahead to snap up tonnage, in anticipation of a further rise in freight rates, nine cargoes have also been covered for May loadings, the estimates showed.

More loadings will imply absorbing of excess tonnage, which has weighed on the market, as several new buildings enter the fleet.

“The Easter holidays are going to be good for the owners as the rise in VLCC rates have increased their earnings,” said a broker in Singapore. Volatility continues to be there due to the unusual interest of owners and charterers in the market, the broker said.

The daily earnings for VLCCs on the key Persian Gulf-Far East routes are now around $29,000/day, up from $13,000-$14,000/day around 10 days earlier, according to the estimates of brokers.

The key Persian Gulf to Japan route was overnight assessed w11 points higher day on day at w69.5, according to Platts data.

The latest fixtures for VLCC loadings on the West Africa-China route have been done around the w70 level, up from around w57.5 towards the end of last month.

CASH DIFFERENTIALS RISING

However, Asian buyers said they are paying close attention to the rising cash differentials of Western crude cargoes in recent weeks, which could make purchasing these grades economically unattractive — despite the narrower EFS.

“Oman is [looking] cheap and Urals [are] not attractive at the moment [due to the higher cash differentials],” said a second North Asian crude trader.

Russian crude Urals, loading out of the Black Sea port of Novorossiisk, this week rose to the highest level of the year so far, due to strong month-end demand for Urals.

CIF Augusta-delivered Urals crude oil was assessed at Dated Brent minus 90 cents/b Monday — the highest since December 5, when it was assessed at minus 88 cents/b. It was last assessed at minus 93 cents/b on Wednesday.

The increase has come from largely unexpected Asian demand for Urals, as four out of the eight April-loading Suezmaxes have been said to be heading to India.

–Ada Taib, ada.taib@spglobal.com
–Sameer C. Mohindru, sameer.mohindru@spglobal.com
–Edited by Geetha Narayanasamy, geetha.narayanasamy@spglobal.com

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