• Cuts to Opec output from the start of 2017 have focussed on the grouping’s Mideast core. This has tightened markets in Asia, raising the value of the Opec crude basket against Brent, and especially US marker WTI. The latter is priced at Cushing, Oklahoma, an inland location just to the north of the Permian shale heartland of northern Texas.
• Not only have benchmark grades strengthened in recent weeks – Brent was trading at $61/B as MEES went to press, the highest level since mid-2015 – but the market tightness in Asia means that Opec grades have strengthened against key global benchmark grades.
The Opec crude basket, which is slanted towards sour grades from the Mideast Gulf, averaged a discount of just over $2/B to Brent in September and October. This discount had narrowed further to just $1.70/B for the first two days of November (see chart 1).
• With WTI’s discount to Brent widening to $6/B, the highest level since early 2015, this has left the Opec Basket valued at a discount of well over $4/B to the US benchmark – a significantly better quality crude than almost all Opec grades in terms of API gravity and sulfur content.
• Not surprisingly this has left light sweet US grades looking cheap to Mideast Gulf producers’ core Asian customers – both China and India are set to take record volumes of US crude this month (MEES, 3 November).
• The tightness of crude supplies in Asian markets, a tightness mostly due to the Opec cuts themselves, has also enabled the organization’s core Gulf producers to hike their prices relative to the regional Oman/Dubai benchmark. Though Asian refiners have the option of buying long-haul cargoes to meet their marginal demand they are, for the most part, contractually obliged to meet baseload demand from their core Mideast suppliers.
• Saudi Arabia is cashing in by raising its Asian official selling prices for December-loading cargoes to their highest levels relative to the Oman/Dubai benchmark since mid-2014 when prices were over $100/B (see chart 2).
