(Bloomberg) — Oil that’s more sulfurous and dense is gaining popularity in the Asian physical market in a rare shift away from the usual pattern as global crude flows change and rewards from refining move in its favor.
Middle Eastern varieties that have medium-density and higher sulfur such as Oman and Upper Zakum are now fetching bigger spot premiums than grades like Murban. That’s unusual as the latter is a lighter oil, typically regarded as better quality since it has a rich yield of refined fuels such as diesel.
The new pattern reflects underlying changes in supply and demand that span the global crude market. OPEC+ supply cuts have crimped flows of dirtier crudes, while at the same time, US producers have been boosting exports of lighter varieties. Vortexa Ltd. estimates that daily supplies of medium and heavy-sour crude into Asia have declined by 920,000 barrels on-year in the first three months.
On the demand side, meanwhile, margins on high-sulfur fuel oil — made more from medium-sour grades — have risen just as profits in Asia from producing diesel fell, according to Bloomberg Fair Value data.
“Medium- and heavy-sour crude supplies have been on a decline, and this has pushed up prices of these crudes,” said Serena Huang, lead Asia analyst at Vortexa. “Middle distillate cracks — mainly diesel — have been coming under pressure from ample supplies, a result of robust refinery runs over the past months that have surpassed demand.”
Other factors have also been at work, according to traders. While diesel has been showing signs of weakness globally, fuel oil — made from the heavier barrels — has seen a boost driven by seasonal demand, with the Middle East consuming more for power generation in the summer months, they said.
In addition, Abu Dhabi has been shipping more lighter oil, while curbing flows of its denser Upper Zakum variety to process that domestically. Elsewhere, Mexico’s halt to some exports has also reduced flows of sour heavy crude.
From here, the outlook depends on “what OPEC+ does at the next meeting and also how gasoline demand evolves over the coming quarters,” said Giovanni Staunovo, commodity analyst at UBS Group AG. That’s expected to offer some support, driving a reversal of the current trend in the coming months.
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