China Oil Trader’s Mideast Spree Contributes to Shake-Up in Global Supply Flows

  • Chinaoil buys Mideast crude as part of Platts pricing process
  • Dubai oil’s strength vs Brent, WTI spurs arbitrage flows east

Chinaoil Helps Raise Value of Mideast Crude

Crude purchases in one corner of the oil market by a Chinese trader are contributing to the shake-up of supply flows across the globe.

China National United Oil Co. last month bought at least 7 million barrels of Middle East crude for March loading as part of an assessment process operated by Platts used to set price benchmarks, data compiled by Bloomberg show. The spree was made at a time the region’s supply is shrinking as producers including Saudi Arabia shoulder a majority of global output curbs.

The purchases by the trader known as Chinaoil have helped raise the value of Middle East crude, which had already turned costlier relative to supplies from other regions on OPEC’s deal to cut production. The increase in the Dubai crude benchmark versus West Texas Intermediate and Europe’s Brent has spurred previously unviable flows of cargoes into Asia from areas such as the Gulf of Mexico and boosted shipments from West Africa and the North Sea.

“Larger importers like Chinaoil can create purchasing strategies based on expected oil demand, taking into account production cutbacks by OPEC and import requirements for strategic petroleum reserves,” said John Driscoll, the chief strategist at JTD Energy Services Pte, who has spent more than 30 years trading crude and petroleum in Singapore. “That can trigger a spree and lift Dubai prices against Brent and WTI, leaving the arbitrage window for oil flows from west to east wide open.”

Officials who answered calls to Chinaoil’s Beijing headquarters and parent company China National Petroleum Corp. said there was no one available to comment during the ongoing Lunar New Year holidays.

Pricing Process

In the Platts price assessment process -- which traders refer to as the window -- bids, offers and deals are reported through e-mails, instant messages and phone conversations in a fixed period each day. These are used to create end-of-day price assessments for various commodities and form benchmarks for transactions around the world. The company is a unit of S&P Global Inc.

“S&P Global Platts’ role is to produce robust price assessments that reflect the value of commodities including fuel oil,” a spokeswoman for the company said in an e-mail. “It is not our role to regulate trading in the physical markets where we produce price assessments.”

Under the Platts pricing mechanism for Dubai crude, so-called partial cargo deals need to be combined into a 500,000 barrel shipment if the same buyer and seller trade 20 of the 25,000-barrel lots in a single month. Chinaoil last month purchased 339 out of the 346 partials traded for March, according to Platts.

Full cargoes bought by the company included Abu Dhabi’s Upper Zakum oil and Qatar’s Al-Shaheen crude, data compiled by Bloomberg show. Sellers included Royal Dutch Shell Plc and Reliance Industries Ltd. Chinaoil has bought much more in a single month previously. It made a record haul of 36 million barrels in August 2015.

The premium for Brent, the benchmark for more than half the world’s crude, over the Dubai oil marker fell to $1.27 a barrel last month, the least since September 2015. The spread was at $1.73 on Thursday. Meanwhile, U.S. WTI slipped to a discount versus the Middle East measure in December amid an increase in American drilling.

Dubai’s strength made Middle Eastern varieties less alluring than Brent-linked supplies from Africa and Europe. West African producers this month will send the most crude to top oil market Asia in at least five years.

Citigroup Inc. estimates 33 million barrels of European North Sea crude is set to sail to Asia between December last year and this month, versus 58 million barrels from January to November 2016.

For a story on how OPEC’s cuts are helping U.S. oil reach Asia, click here

Crude imports by China, the world’s biggest energy consumer, rose to a record average of 7.63 million barrels a day in 2016, official data show. Inbound shipments increased as domestic production fell and more strategic petroleum reserve units were brought online.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE