Shifting Crude Oil Flows Bolster DME Oman

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.

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.

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%.  

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.