Asian crude buyers alter trade strategies as backwardation persists

The sustained backwardation in Dubai crude price structure has prompted various Asian crude buyers to adjust their trading strategies, with Chinese trading firms actively trimming their long physical positions, while various regional refiners shifted their focus to short-haul Russian supplies, market participants said Wednesday.

The spread between first and second-line Dubai crude swaps was assessed at 5 cents/b on August 10 in Singapore, marking the first time the paper market structure has flipped to backwardation since posting 4 cents/b on March 13, S&P Global Platts data showed.

The Dubai swaps spread remained backwardated since then, averaging 18 cents/b in September and 24 cents/b so far this month.

The physical Dubai crude market structure also strengthened to a multi-year high recently, with the spread between front-month cash Dubai and same-month Dubai swap at 71 cents/b on October 17 in Singapore, the highest since July 31, 2015, when it was assessed at 85 cents/b.

Regional sweet and sour crude traders said the backwardation in the Dubai price structure could have encouraged Chinese trading firms to unwind some of the spot cargoes they are holding in recent months, potentially putting the brakes on their growing storage positions.

China’s crude oil stocks rose 20.16 million barrels in September from end of August, representing 11th consecutive month of gains, Platts calculations based on latest official data showed.

However, regional traders and analysts said the country’s inventory levels could slide in the fourth quarter, citing state-run Chinese trading companies’ strong interest in selling cash Dubai crude partials, as well as full cargoes of various Middle Eastern and West African grades during the Platts Market on Close assessment process over the past few months.

A backwardation in the crude market structure represents lower prices for forward month contracts than the current spot price. In essence, backwardation occurs when market participants are expecting future prices to be weaker than prompt prices, hence providing little incentive for trading firms and refiners to store oil for later use.

“Storage incur costs over time but when future prices can’t compensate this, it’s best to offload and lock in stronger prices now,” said a condensate trader at European trading house.


The month of August saw two state-run Chinese trading companies aggressively offload physical Middle Eastern sour crude cargoes during the Platts Singapore MOC process, with PetroChina’s trading arm Chinaoil declaring sale of two October-loading Oman crude cargoes in the month, while Unipec sold a total of eight 500,000-barrel cargoes of Upper Zakum crude and a cargo of Al-Shaheen crude.

Unipec and Chinaoil often trade oil barrels overseas, but their top priority is to secure crude supplies for domestic refineries under their parent companies.

“Prompt prices are higher so it’s profitable to sell into the stronger demand structure now … storage plays only work in a steep contango structure,” said a sour crude trader based in Singapore.

Under the Platts MOC process partials mechanism, the seller must declare a full 500,000-barrel cargo of crude oil to the buyer after a total of 20 partials have been traded for the same loading month between the companies.

So far this month, Unipec has sold six cargoes of medium sour Oman crude for loading in December, and the trading arm of China’s Sinopec was seen offering a full 500,000-barrel cargo of Upper Zakum crude during the MOC process in Singapore Tuesday.

Furthermore, in a rare move, Unipec — one of the largest West African crude buyers — has been offering a number of cargoes from Angola and the Republic of Congo over the past couple of weeks during the Platts MOC process in London.

Last week, the company sold two 950,000-barrel cargoes of Angolan crude — one for November loading while the another cargo was for December loading.

Apart from the Chinese traders, Indian and South Korean companies were also seen unwinding some of their long positions held in the physical Dubai market.

Reliance Industries Ltd. declared one 500,000 barrel-cargo of Oman crude to Chinaoil after selling its 20th December cash Dubai partial to the Chinese company at $55.90/b Monday.

Earlier this month, trade sources said SK Energy could have sold a December cargo of Upper Zakum crude to an unidentified buyer at a premium of around 35 cents/b to the Abu Dhabi grade’s official selling price for the loading month.


The backwardated market structure has also prompted some regional end-users to scramble for short-haul supplies, with end-users in both Northeast and Southeast Asia shifting their focus to Far East Russian grades including Sokol and ESPO Blend.

Apart from Asian refiners’ winter feedstock requirements, the current backwardation in the Dubai price structure would greatly favor the Far East Russian grades due to geographical proximity, regional traders said.

“[When the market is backwardated, buyers would seek to minimize losses [in the value of oil] during the transportation period,” said a sweet crude trader at a Japanese firm.

Refiners in Northeast Asia were particularly keen to secure some short-haul Russian crude supplies with latest market talk indicating that a South Korean end-user could have bought a 700,000-barrel cargo of Sokol crude for loading in December from Tokyo-based Sakhalin Oil and Gas Development Co. at a premium of more than $5/b to Platts Dubai on a CFR North Asia basis.

ESPO Blend crude was also attracting plenty of buyer interest in Asia, as Taiwan’s Formosa Petrochemical Corp. issued a rare spot tender early in the month, seeking a 730,000 barrel cargo of the medium sweet Far East Russian grade for delivery in December.

Furthermore, two refiners in Malaysia and Thailand were making a few inquiries to ESPO Blend crude suppliers this week, a source at a western trading company with knowledge of the matter said.

Industry sources pointed out that the longer voyage time often makes it less advantageous in a backwardation for buyers to look at long-haul supplies, as they will be paying a higher price upfront and by the time it arrives in the refinery the price of oil would be lower.

Typical voyage time from ESPO crude loading port of Kozmino in Far East Russia to Northeast Asia is less than four days versus around 30 days from Persian Gulf ports and more than six weeks from major North Sea crude terminals in Europe.
Source: Platts