Sunday 24th September, 2017
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The oil trade showing where OPEC's cuts are starting to bite

The oil trade showing where OPEC's cuts are starting to bite

As OPEC starts to make its production cuts work, the true impact of its ac­tions is perhaps most in evidence in an obscure part of the physical oil market.

While Brent futures, a bench­mark based on North Sea supply, are trading about $4 a barrel high­er than their peak in June, the price of cheaper Middle East crude is ris­ing faster still. The gap between the two varieties -- now the smallest in 15 months -- reveals where buyers are experiencing the greatest sup­ply restrictions. It also has the po­tential to influence where oil flows.

Saudi Arabia and its neighbor­ing countries mostly pump lower quality oil, known in the industry as heavy crude. So when produc­tion from Organization of Petro­leum Exporting Countries drops, the price difference -- or spread -- between those grades and high­er quality light crude such as Brent and West Texas Intermediate typi­cally gets smaller.

“Heavier crudes have always been the first to get cut so that looks like the spread to watch,” said War­ren Patterson, a commodity strate­gist at ING Bank NV.

The best sign of how prices are converging is in the so-called Brent-Dubai exchange of futures for swaps, which lets refiners better manage their exposure to the rela­tively illiquid heavy crude market by allowing them to use the larg­er liquidity of the Brent market for hedging. The Brent-Dubai EFS spread fell to a 15-month low of $1.68 a barrel this week, down from $3.71 a barrel in June, according to data from brokerage PVM Oil As­sociates. It traded at $1.80 at 11:26 a.m. in New York.

Although oil traders such as Vi­tol Group and some specialized hedge funds actively trade light-heavy crude spreads, the market is relatively out of sight for main­stream oil investors, who focus on Brent and WTI. As such, the light-heavy spread usually reflects de­mand from refiners and physical buyers and sellers affected by OPEC cuts, rather than speculative trades.

“The physical market pricing in OPEC cuts is probably the main driver at the moment,” Giovanni Staunovo, commodity analyst at UBS Group AG in Zurich, said. “If OPEC target the higher cost barrels that will remove heavier crude from the market.”

In 2009, the previous time OPEC cut output, Dubai traded intermit­tently at a premium to Brent, de­spite the fact the Middle East crude is normally viewed as being lower quality. At its peak, Dubai traded at a premium of 71 cents to Brent. In 2011, it traded at a discount of al­most $8 a barrel.

OPEC pumped 33.1 million bar­rels a day last month, down 310,000 barrels a day from November, ac­cording to a Bloomberg News sur­vey of analysts, oil companies and monitoring of ship-tracking data.

The decline comes as OPEC, which controls around 40 percent of global oil supply, is planning to curb output in a bid to boost prices. The organization reached a histor­ic deal last month with Russia and other non-members to cut glob­al production by about 1.8 million barrels a day for six months start­ing January.