Middle East crude oil has been a mainstay in the Asian refining sector for many decades. More recently, regional producers have benefited from the demand surge in the fast-growing economies of China and India. But in a market that is increasingly globally interlinked, competing supplies from the West and Africa constantly vie for market share.
Producers, refiners and traders use oil benchmarks to analyze arbitrage economics. Platts Dated Brent and Platts Dubai are among the most widely used benchmarks around the world for physical crude oil prices. Each has its own characteristics, with the Dated Brent complex being typified by light, sweet crudes in the North Sea region.
On the other hand, Platts Dubai reflects the value of medium sour crudes that are often favored by buyers in Asia, who configure their refinery operations to meet these specifications. The correlation between these benchmarks is often activity-traded, alongside exchange listed instruments that are used by market participants to hedge and manage risk of their physical exposure.Â
Established four decades ago, Platts Dubai reflects the value of widely tradeable, readily deliverable barrels of crude in the region’s spot markets. It has evolved with the addition of new crudes as alternative delivery into the basket to ensure there is suitable availability of crudes to meet spot market demand.
Dubai now represents an overall basket of crudes, rather than just the original single grade. Production of Dubai crude itself has fallen to around three cargoes a month, but the benchmark represents around 60 times that volume through alternative delivery. The five crude grades included in the Platts Dubai basket are Dubai, Oman, Abu Dhabi’s Upper Zakum and Murban as well as Qatar’s Al Shaheen, now represent over 3.5 million b/d of crude production.
Brent/Dubai EFS
The Brent/Dubai exchange of futures for swaps contract, or EFS, is a measure of medium, high sulfur crudes’ discount to light, low sulfur ones. A wider EFS makes crude priced against Dubai more economically attractive for Asian refiners compared to Brent-linked ones and the spread is a key determinant of flow for various grades of oil around the world.
The May Brent/Dubai EFS recently topped $3/b for the first time since late 2019, virtually shutting the arbitrage flow of rival barrels into Asia and starting a scramble for crude oil from the Middle East. The spread has since eased off to around $2/b and crude oil traders say the threats from arbitrage oil from the West and Africa is likely to resurface given the glut of light, sweet barrels that has recently built up in these regions.
Effects of the wider spread between these two major benchmarks are being felt globally. A wide Brent/Dubai EFS is now enabling the rare flow of Dubai-linked cargoes of Far East Russian cargoes of ESPO blend crude to the US West Coast.
Going ahead, geopolitical changes will have further ramifications for this spread. All eyes are now on Iran and Venezuela amid market talk that the new US administration could potentially ease sanctions on oil exports from these countries. Both Iran and Venezuela are large producers of oil that fall in the category of grades linked to Dubai. Larger exports from both would therefore push the Brent/Dubai spread wider.Â
Meanwhile, the OPEC+ recent rollover of production cuts, coupled with Dubai’s discount to Brent is fueling concerns over further tightening in the Middle East market that could prompt suppliers such as Saudi Arabia and Iraq to substantially raise their official selling prices in coming months.
The strength in the Dubai market and expectations for higher OSPs for Middle East crude is prompting some Asian refiners to continue to explore arbitrage opportunities even when economics are stretched.
India for one has been among the front-runners in picking up arbitrage cargoes that are being offered at deep discounts; opportunities elsewhere in Asia have been shut due to a wide Brent/Dubai spread.
Middle East producers constantly monitor arbitrage spreads in setting their OSPs each month. They are aware that large unsold stocks, especially in West Africa and Europe, could drive down spot differentials for these light sweet grades. This could make arbitrage crude an economical option for Asian buyers if premiums in the Dubai market continue to strengthen.
