Light crudes back at premiums to medium grades

The price spreads for lighter crudes to medium and heavy grades are starting to move back to levels seen before the early-March collapse in oil markets, as improved refining margins help lift demand for lighter crudes.

The August Brent-Dubai exchange of futures for swaps (EFS), or the spread of light sweet Ice Brent crude futures to medium sour Mideast Gulf Dubai crude swaps, flipped back to a premium this month on stronger Ice Brent prices. The EFS had mostly been a discount in the last three months. It fell to a discount on 11 March for the first time in a decade.

There are other indications of a recovering light crude market. Saudi Arabia's state-controlled Saudi Aramco has raised the latest July official formula price for its light sour Arab Extra Light crude to a 20¢/bl premium to medium sour benchmarks Oman/Dubai, after setting Arab Extra Light at discounts to Oman/Dubai in the previous three months. Aramco also set the July Arab Extra Light formula price at the same level as medium sour Arab Light crude. Aramco had set the May and June formula prices for Arab Extra Light below Arab Light. This was the first time that Arab Extra Light had been set below Arab Light.

Higher-quality light crudes have traditionally commanded a premium to medium and heavy grades, but the April Arab Extra Light formula price had been set at a discount to Oman/Dubai — for the first time in five years — to reflect a light crude market that was severely depressed because of weak refining margins for light oil products. Refining margins for gasoline and jet-kerosine in Asia-Pacific were negative for most of April-May as Covid-19 lockdowns drastically reduced air and road travel.

The weakness was also evident in the price for Abu Dhabi light sour Murban, with the grade falling to deep discounts to Dubai earlier this year. Spot volumes of June-loading Murban traded at around a $9/bl discount to Dubai in April. Murban crude, with its relatively high yield of naphtha, gasoline and jet-kerosine, was hit particularly hard by the decline in Asia-Pacific refining margins. Murban values were weak enough at the time sellers chose to deliver the grade into the Dubai partials mechanism rather than lower-quality medium sour Oman, Qatar Al-Shaheen or Abu Dhabi Upper Zakum crudes. Abu Dhabi's state-owned Adnoc set Murban official formula prices for April, May and June cargoes at discounts of $2.75/bl, $6.95/bl and $4.45/bl to Dubai, respectively, the only months on record that Adnoc had set the official Murban price below Dubai.

The market seems to now be rebounding, as Adnoc has set its latest July formula price for Murban at a $1/bl premium to Dubai. Part of the rebound is because of Opec+ output cuts, which have curbed exports of Murban. Lower US oil production had also limited the availability of light sweet US crude in Asia-Pacific. And improved refining margins have helped, with gasoline and jet-kerosine margins currently at positive levels. But the recovery is fragile, as product demand in Asia-Pacific is just starting to rise and refining margins are nowhere close to January-February levels. Significant increases in global crude production, or a potential second wave of Covid-19 infections that may again lead to lockdowns, could quickly pull down the values for Murban and other light crudes.

By Azlin Ahmad and Fabian Ng