Shake-Up in Global Supply Flows Contributed by China Oil Trader’s Mideast Spree

Contributing to the shake-up of supply flows across the globe are crude purchases in one corner of the oil market by a Chinese trader.

Data compiled by Bloomberg show that loading as part of an assessment process operated by Platts used to set price benchmarks, China National United Oil Co. last month bought at least 7 million barrels of Middle East crude for March. As producers including Saudi Arabia shoulder a majority of global output curbs, the spree was made at a time the region’s supply is shrinking.

The value of Middle East crude, which had already turned costlier relative to supplies from other regions on OPEC’s deal to cut production, has been helped to rise by the purchases by the trader known as Chinaoil. Europe’s Brent has spurred previously unviable flows of cargoes into Asia from areas such as the Gulf of Mexico and boosted shipments from West Africa and the North Sea and the increase in the Dubai crude benchmark versus West Texas Intermediate.

“Larger importers like Chinaoil can create purchasing strategies based on expected oil demand, taking into account production cutbacks by OPEC and import requirements for strategic petroleum reserves,” said John Driscoll, the chief strategist at JTD Energy Services Pte, who has spent more than 30 years trading crude and petroleum in Singapore. “That can trigger a spree and lift Dubai prices against Brent and WTI, leaving the arbitrage window for oil flows from west to east wide open.”

Bids, offers and deals are reported through e-mails, instant messages and phone conversations in a fixed period each day in In the Platts price assessment process — which traders refer to as the window. For transactions around the world, forming benchmarks and creating end-of-day price assessments for various commodities makes use of these. The company is a unit of S&P Global Inc.

“S&P Global Platts’ role is to produce robust price assessments that reflect the value of commodities including fuel oil,” a spokeswoman for the company said in an e-mail. “It is not our role to regulate trading in the physical markets where we produce price assessments.”

If the same buyer and seller trade 20 of the 25,000-barrel lots in a single month, so-called partial cargo deals need to be combined into a 500,000 barrel shipment under the Platts pricing mechanism for Dubai crude. According to Platts, Chinaoil purchased 339 out of the 346 partials traded for March last month.

Abu Dhabi’s Upper Zakum oil and Qatar’s Al-Shaheen crude are included in full cargoes bought by the company. Sellers included Royal Dutch Shell Plc and Reliance Industries Ltd.

Compared to Brent-linked supplies from Africa and Europe, Dubai’s strength made Middle Eastern varieties less alluring. West African producers this month will send the most crude to top oil market Asia in at least five years..

Versus 58 million barrels from January to November 2016, set to sail to Asia between December last year and this month are 33 million barrels of European North Sea crude, Citigroup Inc. estimates.

(Adapted from Bloomberg)

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