Baffling Oil Surge Makes Obscure Benchmark the World's Costliest

(Bloomberg) -- A two-day surge turned a sludgy, sulfurous and low-quality crude into the world’s costliest oil benchmark this week, confounding traders and throwing the market into turmoil.

Oman oil on the Dubai Mercantile Exchange, which will play a key role when Saudi Arabia sets the cost of its shipments to Asia next month, is now more expensive than New York’s West Texas Intermediate and London’s Brent. Speculation over what drove the gain includes lower supply of similar-quality barrels from Iran because of U.S. sanctions and purchases by top crude importer China.

The dramatic gain of 11 percent in just two days reverberated this week around the annual Asia Pacific Petroleum Conference in Singapore -- one of the biggest gatherings of the global oil-trading industry. “Have you seen Oman?” replaced “Good evening” for many in the cocktail circuit.

The speed and strength of Oman’s surge versus other benchmarks surprised market participants, industry consultant JBC Energy GmbH said in a report on Thursday. “It is very unusual to see DME at a premium to ICE Brent, let alone at such a high level. Given that the vast share of Omani crude is delivered to China, it is easy to conclude that it is the main driver for this unusual jump.”

Previously a lesser-known marker, DME Oman’s status was boosted by Saudi Arabia’s decision to start using it as a reference in how it prices supplies to Asia. Now, concern is growing over whether the surge will inflate the cost of the Middle East producer’s cargoes compared with those from Kuwait and Iraq, who haven’t switched to the new benchmark, according to a Bloomberg survey of five traders and refiners.

Cargo Risk

One executive at an Asian buyer said it might consider seeking to take fewer the cargoes from Saudi Arabia if they are too expensive versus other supplies. OPEC’s biggest member is expected to announce official selling prices for November-loading shipments in the next couple of weeks.

Oman briefly traded on Wednesday as high as $90.90 a barrel on the DME. By the end of Singapore trading at 4:30 p.m., it was at $88.96 a barrel, compared to $82.15 for Brent, and $72.36 for WTI.

“While we expect the spread to quickly return back to normal levels, Oman should remain relatively strong, reflecting the increasing tightness in the Asian crude balance,” JBC said in its report. Healthy processing margins and reinvigorated independent refiners in China are providing ample demand, it said.

The November DME Oman contract’s premium to ICE Brent for the same month narrowed to $2.28 a barrel at 4:30 p.m. in Singapore on Thursday.

Sulfur Content

Oman is considered a sour crude due to its high sulfur content, making it more difficult to refine into petroleum products such as gasoline and diesel. That means it usually trades at a discount to lower-sulfur, or sweet benchmarks Brent and WTI.

The closely watched spread between Oman and swaps for Dubai crude, another key Middle East benchmark used to price regional cargoes, widened to a record of over $10 a barrel earlier this week, surpassing the peak set in 2011 at $6.22 a barrel, according to data from S&P Global Platts. It was at $5.73 a barrel on Thursday.

Near-term Oman contracts are also surging versus those for later, exacerbating a market structure known as backwardation. The three-month timespread settled at $7.14/bbl on Wednesday, the steepest backwardation since the futures debuted in 2007, according to data compiled by Bloomberg.

--With assistance from Sharon Cho and Alfred Cang.

To contact the reporters on this story: Serene Cheong in Singapore at scheong20@bloomberg.net;Javier Blas in London at jblas3@bloomberg.net

To contact the editors responsible for this story: Pratish Narayanan at pnarayanan9@bloomberg.net, Alexander Kwiatkowski

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