Oil Price Gap Between Brent And Dubai Widens, Suggesting A Return Of Excess Supply?

Since mid March, international crude oil prices have continued to fall into the trend of convergence and consolidation, as the market's long and short news continues to be in a seesaw. On the one hand, the warming trend of the global economy has pushed the demand outlook to continue to rise. On the other hand, OPEC + oil producing countries and the shale oil industry of the United States are also cautiously increasing production, which temporarily maintains the market balance. However, the widening price gap between benchmark Brent crude oil and Middle East crude oil is telling investors that the current situation in the global oil market is not as balanced as the apparent price shows.

In fact, the current premium price difference between North Sea Brent crude oil and Dubai crude oil has reached the maximum level in 16 months since the end of 2019, which shows that the Middle East region has a relatively oversupply of crude oil, so that it can only be sold at a price significantly lower than the benchmark Brent crude oil in the international market. However, once the price preference degree reaches a certain level, the price of Brent crude oil in the Middle East can be sold, But it will also trigger international buyers to shift their purchasing direction, which will trigger the next round of chain reaction in the global oil market sooner or later.

At the beginning of this month, OPEC and its allies agreed to resume production capacity of 2 million barrels per day by July, in order to gradually lift the production restriction measures since the outbreak of the epidemic last year, so as to pave the way for the final production capacity to return to normal. The reason why OPEC + is so arranged is that they are confident that the further promotion of the vaccine will further increase the level of global economic activity. At the same time, the expectation that negotiations on Iran's nuclear issue is expected to restart further makes investment bets that supply from the Middle East will increase. This coincides with the time window when the Beihai oilfield enters the routine maintenance period, which together creates a situation in which the benchmark crude oil price in the Middle East expands relative to Brent crude oil discount.

This is in sharp contrast to the previous pattern. In most of the second half of 2020, the price difference between Brent crude oil and Dubai crude oil is negligible, and the price of the latter has occasionally been inverted. As a result, with the relative price of crude oil in the Middle East going down, Asian buyers will no longer have to go further and buy crude oil from the Atlantic basin and West Africa. This situation was reinforced by the interruption of the Suez Canal. After the Suez Canal was blocked, the cost of transporting crude oil from the Middle East to Europe increased, as did the crude oil from the Atlantic region and West Africa to the Asian market, which is also the key factor in widening the price gap between them.

However, the high price gap can not be maintained for long because the competitive pressure of sellers has begun to pass. Since last week, oil producing countries such as Angola and Nigeria in West Africa have also followed suit in lowering crude oil export prices, and some contracts have even fallen to new lows since November last year. International buyers are also concerned about the expected impact of Iran's further recovery of export capacity since then, because Iran's export share lost due to sanctions has not been included in the OPEC + production reduction quota. Therefore, once the country even partially restores its exports, the still fragile global balance of crude oil supply and demand may be overturned again.

Analysts pointed out that the current price difference between Brent and Dubai crude oil may also be a good factor for the Middle East oil producing countries, which play a leading role in OPEC +, to expand their global market share. However, the flexibility of both buyers and sellers in the market also means that the pattern of high premium of Brent benchmark oil price will not last forever. Once the oil producing countries misjudge the supply and demand prospects and make excessive efforts in the operation of increasing production and reducing prices, they may still hit their own feet.