Middle East oil benchmarks Dubai and DME Oman have nudged above prices for Brent crude, an unusual move as U.S. sanctions on Venezuela and Iran along with output cuts by OPEC tighten supply of medium to heavy sour oil, traders and analysts said.
Sour crudes, mainly produced in the Middle East, Canada and Latin America, have a high sulphur content and are usually cheaper than Brent, the benchmark for low-sulphur oil in the Atlantic Basin.
But Dubai spot prices and DME Oman crude futures for April have held above ICE (NYSE:ICE) Brent at Asia’s market close since the start of February, data from the Intercontinental Exchange (ICE), Dubai Mercantile Exchange and Refinitiv Eikon showed.
“The forceful implementation of U.S. sanctions on Venezuelan crude exports, the greater-than-expected recent Saudi crude output cut … and the uncertainty over U.S. sanction exemptions on Iranian crude have all served to strengthen sour crudes relative to sweet benchmarks such as Brent,” said Tilak Doshi, a Singapore-based analyst at consultancy Muse, Stancil & Co.
U.S. sanctions on Venezuela suddenly halted its crude exports to the United States last month and created a strong pull for medium and heavy sour crude from other places, said the traders and analysts.
The sanctions, aimed at blocking Venezuelan President Nicolas Maduro’s access to the nation’s oil revenue, will be extended to non-U.S. oil buyers from April 28, potentially stopping them from paying for Venezuelan oil in U.S. dollars.
Elsewhere, uncertainty over whether Washington will in May extend waivers to sanctions on Tehran’s oil exports that it previously granted to top Iranian crude buyers – China, India, Japan and South Korea – is also boosting Middle East oil prices.
And a decision by the Organization of the Petroleum Exporting Countries (OPEC) and Russia to rein in oil output has buoyed sour crude prices as well. Market observers expect Middle East producers to cut output of heavier oil to meet the curbs.
(GRAPHIC: Sour crude prices rise above Brent – https://tmsnrt.rs/2TBR6JB)
MISSION TO BUY MARS
Strong demand from the United States for heavy oil to replace Venezuelan supplies has boosted prices for U.S. Mars crude and Latin American grades, restricting supplies of those cargoes to Asia, traders said.
Offers of Mars crude for April delivery to North Asia have risen more than $1 a barrel, while spot premiums for Latin American grades such as Castilla from Colombia, have climbed by $2 a barrel, traders said.
Castilla was sold out even before its loading program was released, said one of the traders. The sources declined to be identified as they were not authorized to speak with media.
U.S. refiners are also seeking more supplies from the Middle East, creating a pull for such barrels at a time when Asia’s sour oil demand is growing as two new refineries have started trial runs in China and Malaysia.
Meanwhile, refiners globally are also processing more medium and heavy crude to reap higher profits from fuel oil and middle distillates. That has kept the price gap between Saudi’s Arab Light and Arab Heavy crude in Asia close to the narrowest in a decade.
“Heavy sour strength is bolstered through the first-half of 2019 by continued complex refinery capacity growth and tight fuel oil markets, before IMO 2020 presents a cliff for (high-sulphur fuel oil) demand,” Citi analysts said.
IMO 2020 refers to a mandate by the International Maritime Organization requiring ships to switch to low-sulphur marine fuel from 2020.