The crude oil market has witnessed some of the highest volatility in living memory, casting a spotlight on the value of different benchmarks and liquidity and yield of crude that is delivered into them.
Typically, the value of a grade of crude oil is defined by the underlying value of the products that are produced when it is refined. The refinery yields of different crude grades and underlying refinery economics are critical in analyzing the competitiveness of competing crudes.
Crudes are not homogenous and there are hundreds of different types, each with their own qualities and characteristics. The international market has settled on using certain benchmarks, against which the values of crudes are measured.
For a crude benchmark to be robust it must have a variety of often disparate characteristics. These include abundance in production volume, steady quality, diversity of buyers and sellers, geographic relevance and absence of interference, from political forces for example. Many crudes around the world share some of these characteristics but only a handful fulfill all criteria.
Within the Middle East reference prices include Platts Dubai, Platts Oman and DME Oman, each having different characteristics.
Both Platts Dubai and Platts Oman offer an alternative delivery mechanism, which means that more than one crude grade can help form the daily value of the assessment and ensure sufficient liquidity for the benchmark. For Platts Dubai, this includes the alternative delivery of Oman, Upper Zakum, Al Shaheen and Murban. For Platts Oman, Murban is also acceptable as an alternative deliverable grade.
Total deliverable crude on a daily basis for Platts Dubai can therefore be calculated as the daily production of the five streams of crude that go into the assessment. Clearly, not all of this volume will be freely available on the spot market on any given day. Some will be diverted into domestic refineries and some cargoes may have destination restrictions. Yet the liquidity pool remains deep. A conservative estimate of crude available for delivery into Platts Dubai is 2.75 million b/d, while 1.75 million b/d is available for Platts Oman.
The DME Oman futures contract is underpinned by Oman’s 950,000 b/d production and after allowing for domestic refinery consumption, around 800,000 b/d is available – slightly more than a cargo and a half of crude per day.
Crude oil grades from the Middle East are sought by complex refiners in Asia, which typically blend different crudes to customize their preferred slate required for their processing units. As a result, the underlying value of these different grades is critical when a refiner is evaluating which grade to purchase as part of their monthly requirements.
Changes in value of different crude grades can be linked to the value of the products that the crude makes, with gasoline historically king of the barrel.
Murban, which is among the lighter and sweeter crude grades across the Middle East, has the highest yield of gasoline among all the crudes in the Platts Dubai and Platts Oman alternative delivery mechanisms. This explains why it has typically been valued the highest.
However, with gasoline demand decimated due to Covid-19, Murban was more competitively valued versus the other grades as its yield values shifted to reflect the economics of refining the grade.
Oman crude is mostly sold to China, which arguably has different refining economics to other end-users. Critically, Beijing adjusts domestic retail prices for oil products once crude oil falls below $40/b. The breakdown of traditional refining economics focusing on the yield value of a particular crude have led to Oman crude trading away from other grades in the region.
With Oman being the only deliverable into DME Oman, the contract diverged and moved substantially higher relative to the Platts Dubai and Platts Oman assessments. While it averaged 11 cents/b above Platts Oman in February, the difference leapt to over $3.15/b in April and May.
This increased spread has likely impacted the economics for refiners in Asia processing grades that are priced against these different markers.
The yield for the different crudes needs to be considered against the price of the different benchmarks to examine their relative competitiveness from a refinery’s perspective. The availability of suitable alternative grades that can be delivered into a benchmark ensures tradable value and stable prices that are useful for all producers and buyers. Not just a single consumer of a single grade of oil.
