Demand for Middle East crude still sizzles while supply fizzles out

Singapore (Platts)--19Nov2010/344 am EST/844 GMT

Strong demand for crudes loading from the Persian Gulf by Chinese, Indian and Japanese refiners is continuing while supply is starting to run out, market sources said.

Reflecting prompt strength, the Dubai market flipped into backwardation November 11 -- the first time for the year -- and there are no signs the market will slip back into a contango, with the December/January cash Dubai spread showing a backwardation of 19 cents/barrel Friday afternoon.

The strength in the market is a result of several factors. The arbitrage of crudes from the West to the East has been largely shut due to the continuation of the wide Brent/Dubai spread, which essentially makes grades pricing against Dated Brent -- such as Russian or Angolan crudes -- very expensive for Asian refiners.

This has put the onus squarely upon Middle East producers to supply the Asian market, and the effect has been obvious.

Market sources said that available cargoes of naphtha-rich grades such as Upper Zakum have dwindled with almost none left for January lifting. On average, the Abu Dhabi grade has been trading at spot premiums of between 30 and 50 cents/b this month. Similarly, Murban was heard to be selling out fast, even as spot premiums for the crude rose to over 45 cents/b. Two Japanese companies were heard to have bought the crude at premiums closer to 60 cents/b.

Murban has traded at premiums as high as $1.40/b in 2004, and has traded as low as a discount of $2.50/b in late 2008. Since January 2010, the differential has averaged to a premium of just 7 cents/b.

Looking at other Middle Eastern crude grades, market sources said they were eagerly awaiting for results of a tender for Al Shaheen crude, which will provide further direction for the market.

Asian refiners have steadily snapped up crude cargoes, partly in preparation for a cold winter. "Japan expects a cold winter," said a refiner. "Last week, North China also turned cold, so there is buying. This will continue maybe up till January," he added.

--Sharmilpal Kaur, sharmilpal_kaur@platts.com

To subscribe or visit go to:  http://www.platts.com