Opec cuts, US sanctions spur sour crude prices

Opec oil supply

Dubai and DME Oman, Middle East oil benchmarks, have pushed prices above Brent crude as US sanctions on Venezuela and Iran along with output cuts by OPEC tighten supply of medium to heavy sour oil.

Data from the Intercontinental Exchange (ICE), Dubai Mercantile Exchange and Refinitiv Eikon showed that Dubai spot prices DUB-1M-A and DME Oman’s April crude futures have held above ICE Brent at Asia’s market.

Tilak Doshi, a Singapore-based analyst at consultancy Muse, Stancil & Co said that the forceful implementation of US sanctions on Venezuelan crude exports, Saudi crude output cut and the uncertainty over US sanction exemptions on Iranian crude have all served to strengthen sour crudes relative to sweet benchmarks such as Brent.

The US sanctions on Venezuela which aim to prevent Venezuelan President Nicolas Maduro’s access to the nation’s oil revenue, will be extended to non-U.S. oil buyers from April 28. It will potentially stop them from paying for Venezuelan oil in U.S. dollars and will make a strong pull for medium and heavy sour crude from other places.

The decision by the Organization of the Petroleum Exporting Countries (OPEC) and Russia to control oil output has also put sour crude prices up as well.

Furthermore, uncertainty over Washington’s decision to extend waivers on Iran’s oil export sanctions to top Iranian crude buyers like China, India, Japan and South Korea contributes in boosting Middle East oil prices.

On the other hand, US refiners are now looking at Middle East to provide more supplies.This creates a pull for such barrels as two new refineries have started trial runs in China and Malaysia making Asia’s sour oil demand increase.

Meanwhile, to reap higher profits from fuel oil and middle distillates, refiners globally are now processing more medium and heavy crude. Thus, keeping the price gap between Saudi’s Arab Light and Arab Heavy crude in Asia close to the narrowest in a decade.

A Citi analysts said that the heavy sour strength is bolstered through the first-half of 2019 by continued complex refinery capacity growth and tight fuel oil markets, before IMO 2020 presents a cliff for (high-sulphur fuel oil) demand. IMO 2020 refers to a mandate by the International Maritime Organization requiring ships to switch to low-sulphur marine fuel from 2020.

Sour crudes, which contain high sulphur and usually cheaper than Brent, the Atlantic Basin’s benchmark for low-sulphur oil, are mainly produced in the Middle East, Canada and Latin America.