Cheap US oil undercuts Middle Eastern crude in top demand centre

Oil barrels Source: iStock/Guven Polat

Asian buyers have snapped up a huge volume of cheap US oil early in the latest trading cycle for spot physical barrels, raising the prospect of reduced demand for Middle Eastern crude.

South Korean and Indian oil refiners have so far purchased around 16-to-18 million barrels of US crude this month that will be mostly delivered during November, according to traders with knowledge of the matter. That’s double the amount acquired over the same period in July and just shy of the average monthly volume during the first five months of this year.

Saudi Arabia signaled confidence in the demand outlook earlier this month after it raised its crude prices for Asia to a record, despite futures and time spreads reflecting concerns over an economic slowdown. However, the kingdom priced some of its oil at lower-than-expected levels to remain competitive against arbitrage flows into the region, such as those from the US.

Offers for West Texas Intermediate Midland, a key US export grade to Asia, are less than an $8 a barrel premium to the Dubai benchmark for barrels scheduled to arrive in November, said traders who buy and sell those cargoes. That’s cheaper than comparable Murban crude, the flagship grade of the United Arab Emirates, when taking into account freight and logistics, they added.

An increase in Libyan output and an uncharacteristic dip in US gasoline demand during the peak driving season have added to the abundance in Atlantic Basin supply and weighed on prices. WTI last week slipped to a rare discount against Dubai crude, according to data compiled by Bloomberg. A key demand indicator for Middle Eastern oil –Oman’s premium to Dubai swaps – has also narrowed to the smallest gap since June.

There are still some concerns about the outlook after profit margins for making fuels such as gasoline slumped recently and prompted refiners to consider cuts in operating rates. Overall demand for spot cargoes may not be as robust as the past two months following the dip in margins, said traders.

© 2022 Bloomberg L.P.

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