Dubai benchmark slumps to 6-month low amid demand fears, structure crunches

16 Aug 2022

Quantum Commodity Intelligence - The Middle East benchmark Dubai crude price sunk to six-month lows Tuesday on continued fears over demand growth, while market structure continued to contract in a further sign of broader weakness.

Dubai cash for October delivery was assessed by Quantum on Tuesday at $92.10/b, down $2.45/b on the day and the lowest since 21 February, shortly before Russia launched its invasion of Ukraine.

The headline Asian benchmark price has now retreated around $15/b since the final trading day of July when September was still the front-month price, expiring at $107.24/b, although on the same day, the October contract was assessed just shy of $101/b.

Prices have come under pressure in August amid growing fears of a demand slowdown as China's recovery remains fragile, with data highlighting the nation's stop-start economic recovery as ongoing Covid restrictions hamper growth.

"Weak economic data from China put a dampener on the commodities markets at the beginning of the week. Furthermore, concerns about a more pronounced cooling were sparked by a surprising rate cut by the Chinese central bank," said Commerzbank Tuesday.

OPEC said in its monthly report released last week that it expects 2022 oil demand to rise by 3.1 million bpd, or just over 3%, down 260,000 bpd from the group's previous forecast.

This was in contrast to the International Energy Agency (IEA) 2022, which saw oil demand growth up by 380,000 bpd from its previous estimate.

Also on Tuesday, the key M1/M3 spread (Oct22/Dec22) tumbled just above +$4/b, the lowest since early May, while the one-year Dubai curve narrowed below $10/b for the first time since April.

The corresponding M1/M3 spread for the second half of last month was comfortably above $9/b, according to Quantum data, while the one-year spread was still around +$20/b in late July.

Dubai backwardation had been at elevated levels since Russia's invasion of neighbouring Ukraine. In the immediate aftermath, the M1/M3 spread ballooned to a record $15.55/b on 3 March, while the 12-month spread also hit an all-time high of $32.17/b on the same day.

The crunch in spreads is likely to lead to a sharp reduction in October Official Selling Prices by Middle East producers, having set September levels at record highs.