The intermonth structure of Mideast Gulf benchmark medium sour Dubai crude moved deeper into contango in August, as Asia-Pacific demand softened on weak refining margins.
The Dubai intermonth spreads had flipped into contango on 28 July, with prompt values at a discount to forward prices. The contango deepened further in August. Front-month October Dubai has been at a discount of 71¢/bl to third-month December Dubai on average so far in August. This is lower by about $1.33/bl on the month, as front-month Dubai was at a premium of 61¢/bl to third-month prices on average in July.
October Dubai crude prices have been under pressure from weakening refining margins in Asia-Pacific on concerns over a second wave of Covid-19 infections. Demand for aviation fuel has been limited, with Asia-Pacific jet fuel margins falling to a three-and-a-half-month low on 28 August.
Driving activity in Asia-Pacific has also fallen back slightly in August, ending three consecutive months of increases, as Covid-19 cases re-emerge in countries that had previously reported some success in containing the virus. Traders use driving activity as a proxy for gasoline demand.
But heavy sour crude grades have been more supported, helped by a stronger high-sulphur fuel oil (HSFO) market as global and regional demand for the fuel outpaces current availability of supplies. The HSFO market had swung back into backwardation on 17 August.
Expectations of rising availability had already weighed on overall Mideast Gulf crude values. October-loading spot cargoes of Abu Dhabi, Qatari and Bahrain crude were valued at discounts to their respective official formula prices. The Opec+ alliance had eased its collective output cut from 9.6mn-9.7mn b/d during May-July to 7.7mn b/d through to the end of the year.
The weaker Dubai price structure could prompt Mideast Gulf producers to lower the official formula prices of their crude exports to Asia-Pacific. The month-on-month change in the Dubai intermonth spreads is one factor that producers, including Saudi Arabia, consider when setting their monthly crude official prices to Asia-Pacific.
State-controlled Saudi Aramco may cut the October official formula prices of its crude exports for customers in Asia-Pacific by 60¢-$1.20/bl, traders said. The company could reduce the prices of its heavier crude grades by a smaller amount compared with its lighter grades, given the firmer margins for HSFO and weaker distillates' market. Aramco is expected to announce its October crude formula prices around the first week of September.
