In an oil market that is increasingly globally interlinked, there is a consistent battle from producers in the Atlantic basin and the Middle East vying for market share in Asia. Crude oil trade flows into Asia are increasing in part due to the retrenchment of many western-based refiners. At the same time, China’s oil refineries have forged ahead with capacity expansions ‒ leading to a greater demand for imported volumes. It is increasingly certain that China will be the world’s largest oil refiner with a total capacity of about 905 million tons per year or 18.4 million barrels per day, the latest data shows.

The scale of Asia’s refining network will see a greater demand for imports from the Middle East and the Atlantic basin. Price risk management plays an important role in dealing with the price-spread relationships between those crudes priced against Dubai and Oman and those that are priced on a WTI- or Brent-related basis.

DME Oman stands at the center of the Middle East crude trade, along with Dubai, with over 5.5 million barrels per day priced off the Oman benchmark. The Oman futures contract is well suited as a price risk management tool for this trade. 

China continues to diversify its crude sources

The explosive growth in China’s refining capacity has its roots in a major regulatory shift in 2015 when independent refiners (known as the “teapots”) were first allowed to import crude oil. The latest data from Chinese customs administration shows that nearly 50% of China’s crude purchases were from the Middle East producers in the first half of 2021, up from 47% in the same period 12 months earlier.

China is also a significant buyer of other Atlantic basin crudes such as those from the US or the U.K. North Sea. Traders use the liquidity of Brent and WTI to manage some of their associated price risk to the crude market. The price-spread relationship between Brent and WTI and the Oman and or Dubai crude can be managed using the liquid benchmark exchange contracts. 

China's top crude suppliers by region

Brent Oman spread correlation fluctuates

The crude spreads remain volatile, in part due to the different supply and demand fundamentals affecting crudes in each region.

Oman and Dubai reflect the supply/demand fundamentals of the Asian market whilst Brent and WTI tend to reflect the broader fundamentals of the Atlantic basin crude trade.  Traders in the Oman and Dubai markets are looking to manage the sweet-sour crude spread relationships. Due to the changing nature of the global crude flows, the managing of these spread relationships is a growing necessity where the correlation between these grades can drop to as low as 40% or 50%.  

Chart 1: 20-day historical correlation in Brent Oman remains changeable

US crude flows to Asia reach 50% of total exports

US crude exports to Asia reached 50% in June 2021, the highest level for around 12 months, according to the latest export data from the US Energy Information Administration (EIA). Chinese refiners bought an average of 400,000 barrels per day in the latest 12-month period to September 2021, double the level of the same period 12 months prior. Chinese customs data showed that US crude supplies increased over 620% to reach 8.2 million tons between 1H2020 and 1H2021. The globalized nature of the crude trade has created greater trading opportunities for spreads such as Brent/Oman and WTI/Oman. 

Chart 2: US crude exports reach 1.6 million barrels per day

The growth of WTI futures traded during Asian hours has remained robust, partly reflecting the growing demand from the region’s refiners to manage price risk in the US energy benchmark during the Asian trading day. Exchange data shows that up to 20% of the total daily traded volume in WTI futures has been traded during Asian hours over the 12-month period to December 2021, broadly flat compared to the same period one year earlier. On an average per lot traded volume basis, total volume of WTI crude futures during the Asian trading day equated to around 180,000 lots per day. As WTI crude exports to Asia continue to rise, the role of WTI in the pricing mix is expected to gain further traction by the Asian refiners that are refining greater quantities of US crude.  

Chart 3: Asian trading liquidity sees 20% of WTI traded outside US hours

Oman a robust price setting mechanism for Middle East crude

The official selling prices are set based on the average monthly Singapore marker prices established at 4:30 p.m. local Singapore time. Liquidity during this key trading period has become of paramount importance in establishing a solid base for setting the official selling price setting mechanism. Exchange volume shows that over the 12-month period from November 2020 to October 2021, an average of 1,318 lots was traded each day during the Singapore settlement period which equates to around 1.32 million barrels of crude oil (just under three standard cargoes of 500,000 barrels).

Chart 4: Oman Singapore marker trade volumes remain robust

Asia’s insatiable demand for crude oil has seen a growing interest in trading during the Asian trading day. Exchanges like CME Group have developed marker prices that are established at 16:30 local Singapore time. Markers are available for Brent and WTI futures to sit alongside existing Middle East benchmarks to capture the price taker interest from the Asian refiners, many of whom are importing US crude oil or Brent-related crude oil NYMEX basis. CME Group has enabled a Trade at Marker (TAM) functionality on both Brent and WTI prices. A TAM price is analogous to Trading at Settlement where parties are permitted to trade at a differential that represents a not yet known price. The marker prices for WTI and Brent are established using a volume weighted average price (VWAP) of all outright trades on CME Globex for the one-minute period from 16:29:00 to 16:29:59 Singapore time[1].

In comparison, DME Oman Trade at Marker is established using a volume weighted average price (VWAP) of all outright trades on CME Globex over a five-minute period from 16:25:00 to 16:29:59 Singapore time.

Asian refiners that price imports of Middle Eastern, American, or other Atlantic basin crudes can use the Trade at Marker functionality to be able to hedge their exposure to the physical crude oil price over whatever time period they choose but typically this is over the average of the month. This trade is increasingly common amongst clients such as the Japanese refiners or the Chinese teapot refiners where international crude purchased volumes have increased sharply in recent years. 

The role of DME Oman in Asia’s crude oil markets continues to grow, partly reflecting the growing crude oil demand from the region and the need to price it effectively. The growth in the futures benchmark so far has already seen several leading Middle Eastern national oil companies elect to use settlement prices to set the price of their official selling prices to their key refinery buyers.

Refiners in Asia are also beginning to adopt it further a price benchmark reference price due to the growing flows of crude that price against it. Given the strong fundamentals backdrop, DME Oman is likely to remain a strong contender for Asia’s energy pricing needs and its growing traded volumes reflect the influence that the contract is having on the region.

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