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In an oil market that is increasingly globally interlinked, there is a consistent battle between 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 greater demand for imported volumes. It is increasingly clear that China will become the world’s largest oil refiner, with a total capacity of about 905 million tons per year or 18.4 million barrels per day, according to the latest U.S Energy Information Administration data.

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 to manage 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 Diversifies 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 the Chinese customs administration shows that nearly 50% of China’s crude purchases were from Middle East producers in the first half of 2021, up from 47% in the same period a year earlier.

China is also a significant buyer of other Atlantic Basin crudes such as those from the U.S. or U.K. North Sea. Traders use the liquidity of the Brent and WTI futures contracts to manage some of their associated price risk to the crude market. The price spread relationship between Brent and WTI and the Oman 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, while 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 global crude flows, managing these spread relationships is a growing necessity where the correlation between these grades can drop to as low as 40% or 50%.  

20-day historical correlation in Brent Oman remains changeable

More Spread Trading Opportunities

U.S. crude exports to Asia reached 50% in June 2021, the highest level for around 12 months, according to export data from the EIA. Total Asian imports of U.S. crude reached just under 1.4 million barrels per day in 2021, broadly unchanged from the prior year 2020.  Chinese customs data showed that U.S crude supplies increased over 620% to reach 8.2 million tons between 1H 2020 and 1H 2021. The globalized nature of the crude trade has created greater trading opportunities for spreads such as Brent/Oman and WTI/Oman.

U.S. 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 U.S. 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 between January 2021 and January 2022, broadly flat compared to the same period one year earlier.

Asian trading liquidity sees 20% of WTI traded outside U.S hours

A Robust Price Setting Mechanism

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 in 2021, an average of 1,400 lots was traded each day during the Singapore settlement period, which equates to around 1.4 million barrels of crude oil (just under three standard cargos of 500,000 barrels). In the July to December 2020 period, an average of 1,200 lots, or 1.2 million barrels, of oil were traded during the Singapore settlement period.

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 4:30 p.m. 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 U.S crude oil or Brent-related crude oil NYMEX basis.

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 East 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 further adopt a benchmark reference price due to the growing flows of crude that price against it. Given the 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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