Middle East crude for immediate delivery traded at its biggest premium in two years to later shipments last month after Royal Dutch Shell Plc bought an unprecedented number of cargoes.
The price gap between the earliest loadings of the benchmark Dubai grade and those for two months later climbed to $2.82 a barrel on Nov. 21, the widest spread since 2011, according to data compiled by Bloomberg. The increase coincided with Shell’s purchase of 12 million barrels last month via the Middle East crude price-setting system conducted by Platts, a unit of McGraw-Hill Financial Inc.
The premium for prompt cargoes, a market structure known as backwardation, influences the level at which Middle East exporters including Saudi Arabian Oil Co. set official monthly prices for buyers in Asia, according to industry consultants KBC Energy Economics and JBC Energy GmbH. The growing spread shows how deals made in the so-called Platts window, where Shell bought 99 percent of Dubai oil contracts traded last month, can affect benchmark crude prices.
The buying “increased backwardation and the prompt market is heating up,” said Ehsan Ul-Haq, a senior analyst at KBC Energy in Walton-on-Thames, England. “When official selling prices come out, they could be higher than expected.”
Saudi Arabian Oil, known as Aramco, will increase January prices for its benchmark Arab Light grade sold to Asia, according to seven buyers at refiners in China, South Korea, Japan and Taiwan in a Bloomberg News survey last week. Six cited rising backwardation as a reason for the gain.
Arab Light for December is set at $3.45 a barrel above the average of benchmark Oman and Dubai crudes. An increase would push that premium to the highest since January 2012.
“The Saudis do look at the market structure, particularly toward the end of the month,” said Eugene Lindell, an oil market analyst at JBC Energy in Vienna. “If they tend to see there is a strengthening backwardation, they will definitely factor that into their choice.”
The monthly change in Aramco’s price differential has trailed a corresponding increase or decrease in the Dubai backwardation in 17 out of 22 months since January 2012, according to data compiled by Bloomberg.
Front-month Dubai crude in November averaged $2.51 a barrel above prices for the grade two months in the future, according to Bloomberg Fair Value data. That’s up from $1.45 a barrel in October, the data show. The spread between prices was 76 cents a barrel today, the first day of December trading.
Middle East producers, including Saudi Arabia, Iraq, Kuwait and Iran, set prices for their crude as a premium or discount to regional benchmarks and adjust the differentials every month to reflect changes in refining profit margins as well as shifts in supply and demand. The levels are announced a month in advance, meaning Saudi Aramco will issue January prices in December.
Shell bought at least 521 January Dubai partial cargoes in the pricing window last month, according to information from Platts and data compiled by Bloomberg. The only other buyer was China National United Oil Corp., known as Chinaoil, which purchased seven shipments.
Ross Whittam, a London-based spokesman for Shell, said in a Nov. 27 e-mail that the company declined to comment for this article. Li Runsheng, a spokesman for China National Petroleum Corp., Chinaoil’s parent company in Beijing, didn’t answer two calls to his office.
A total of 552 Dubai partial cargoes traded in November, beating the previous single-month record of 434 in September 2007, according to reports published by Platts. There were no trades reported today in the window, according to a Bloomberg News survey of people who monitor the market.
“It would be fair to say that if there is a lot of buying, that prices should react in response to the purchasing activity,” Jorge Montepeque, the London-based director of global market pricing at Platts, said in an e-mailed response to questions. “But markets are very complex and it should not be forgotten that for every buyer there is also a seller.”
Under the Platts Dubai system, the partial-cargo deals must be combined into one 500,000 barrel shipment when the same buyer and seller trade 20 of the 25,000 barrel lots in a single month. Shell purchased 24 full cargoes in November, totaling 12 million barrels. Sellers included Vitol Group, Gunvor Group, Glencore Xstrata Plc, Mercuria Energy Trading, Trafigura Beheer BV and Total SA. China International United Petroleum & Chemical Co., known as Unipec, sold the most at eight shipments.
Spokesmen for Glencore, Gunvor, Trafigura, Total, Unipec, Vitol and Mercuria declined to comment for this article.
Saudi Aramco takes other factors into consideration when setting prices, such as deals in the spot market and refinery margins, according to the buyers in the survey. Asian gasoil cracks, or the profit a refiner can earn from making the fuel, rose almost $3 during November to $19.39 a barrel. A market in backwardation typically implies increased demand amid tightening supplies.
“The Shell buying caught a lot of people by surprise, but it does go to show how strong Asia is in terms of demand,” said Amrita Sen, the chief oil market strategist at Energy Aspects Ltd., a consultant in London. “Asian demand is definitely very strong, so a part of that buying reflects the strength in Asia vis-a-vis the lack of strength anywhere else.”
Global oil demand in October was 91.9 million barrels a day, 1.5 million barrels more than the previous month, Energy Aspects said in a Nov. 27 report. In addition to combined growth of more than 500,000 barrels a day in China and India, countries such as Indonesia, Thailand, Taiwan and Malaysia accounted for an additional 700,000 barrels a day of new consumption, according to the report.
Buying or selling of larger-than-normal positions in the Platts window has happened previously. BP Plc, Glencore and PetroChina Co. bought about 2.6 million metric tons of fuel oil in June, the most since Bloomberg began tracking the data in May 2011 and more than nine times the volume in the previous month. Arcadia Petroleum Ltd. sold 246 of 284 Dubai crude partial cargoes in February, the data show.
Traders report bids, offers and deals to Platts through e-mails, instant messages and phone conversations in a defined period each day, which are then used to create end-of-day price assessments for various commodities and used as benchmarks for trade around the world.
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