OPEC+ Cuts Give Extra Lift to Already-Tight Corner of Oil Market

(Bloomberg) -- For months, the Middle Eastern oil market has been among the tightest in the world as regional exporters support Asia's recovering demand. This week, OPEC+'s surprise output cuts made it even stronger.

Key markers in the Dubai crude market — the benchmark for Middle Eastern grades — leapt higher after the Saudi-led decision. The most active timespread for Dubai swaps jumped to above $1 a barrel in backwardation, according to data from PVM Oil Associates Ltd, outperforming the Brent curve.  

While OPEC+'s production cuts will take effect only next month, Dubai's strength reflects expectations that the reductions will strengthen an already-robust market for Middle Eastern supplies. Saudi Arabia, Iraq, the UAE and Kuwait pledged to cut a combined 980,000 barrels a day of output, with generally heavier and more sulfurous crude as the bulk of their production. 

That's likely to lift the relative value of Dubai crude — which is both a proxy for Middle Eastern oil markets as well as medium-sour oil varieties — against global benchmarks such as Brent even further, a shot in arm for long-haul cargo flows from the Atlantic Basin and Americas into Asia. 

Even prior to the OPEC+ cuts, traders were already bullish on Dubai versus other crudes, as red-hot Chinese demand hoovers up the region's supplies and lackluster European consumption weighs on Brent. 

“Given the bulk of the cuts stem from medium and heavy Middle Eastern producers, we would not be surprised to see Dubai trade at a premium to Brent in the coming months, particularly as China looks to ramp imports,” RBC analysts including Mike Tran and Helima Croft wrote in a report. 

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