European crude oil shipments to Asia have dropped this month to a 4-year low of 7.6 million barrels this month, Reuters trade flow information has revealed on January 24, 2018, as higher Brent prices force shut the arbitrage window.
The January figure so far is less than half the 17 million barrels that European producers shipped to Asia last year, with Asian refiners apparently more willing to buy the costlier Middle Eastern and Russian light crude grades, which yield more diesel fuel. Diesel fuel is currently more profitable in Asia, hence the refiners’ willingness to cough up more for light crude.
The European exporters are suffering the effects of a widening spread between Brent and Dubai, which swelled to over $3 per barrel last November. At this level, Reuters notes, the arbitrage window is considered shut. That was the 1st time this had happened since June 2016.
Among the grades that have benefited the most in terms of price, are Russia’s Sokol, Sakhalin, and ESPO, as well as Abu Dhabi’s Murban, which is currently trading at a premium of $0.23 to its official selling price.
It’s worth noting, however, that the widening of the Brent-Dubai spread was not solely the result of OPEC’s and Russia’s production cuts and the resulting tighter oil supply. In fact, the supply disruption resulting from the shutdown of the Forties pipeline system in December had a lot to do with the higher Brent price, even though the shutdown didn’t last long.
The supply outage caused by the pipeline shutdown combined with greater European demand for the North Sea light crude grades and higher tanker rates, which made Middle Eastern and Russian crude more appealing to Asian refiners.
China, as usual, also had an instrumental role to play in these price movements. As part of its anti-pollution drive, Asia’s biggest consumer of oil announced plans to switch from high-sulfur to low-sulfur diesel in industrial applications late in 2017. This has reinforced the demand for light crude grades, and European exporters have been unable to respond to it.