Dubai woes and the growing influence of US in pricing oil

Dubai has been a crucial price marker for the east of Suez oil markets over the last four decades, instrumental in pricing around 19mn b/d of waterborne crude and condensate exports from Middle East Gulf and the eastern Pacific coast of Russia. It’s also the benchmark Asian refiners use to calculate their refining margins.  

However, the benchmark is facing significant challenges, as evolving global supply and demand dynamics are affecting historical price relationships of the grades that make up the marker. This is something that our MD for Asia, Reza Amanat, discussed at the 2024 Oil Matters Market Oulook Seminar during APPEC last week.

The Evolution of the Dubai Benchmark

The Dubai crude benchmark has undergone extensive changes since its inception in the mid-1980s. It evolved from a single grade to basket of grades (Dubai, Oman, Upper Zakum, Al-Shaheen and Murban) between 2002 and 2016.

Inclusion of new grades have helped expand the physical volumes underpinning the marker, but in particular, the addition of Murban in January 2016 – a light sour grade unlike its medium sour peers in the basket – has proved to be disruptive to Dubai’s identity as a medium sour benchmark.

Four forces are now shaping Murban’s demand and supply fundamentals, and in turn impacting the Dubai benchmark: ‍

1. The Ruwais Crude Flexibility Project (CFP): The project, which was completed at the end of last year, aims to free up Murban volumes that were previously feeding the refinery for exports, by replacing it with more medium sour grades such as Upper Zakum. But the resulting boost in Murban exports, has pressured its values to parity or below medium sour grades, amid finely balanced demand for the grade in Asia
2. Competition from WTI exports: The flow of US crude into Asia since 2016, especially WTI Midland, has created more competition for Murban, especially in north Asia. A lack of expansion in US refining capacity, and Europe’s inability to take additional WTI Midland exports from the US, despite growing WTI Midland production, forces unsold barrels to arrive at the shores of Asia and price to clear. At times when freight rates favour arbitrage flows from the US Gulf, the competition between the two grades weighs on Murban values
3. Fading gasoline demand in the east: The increasing electrification of the private car fleet, especially in China, at the time when more refining capacity is set to come online in the next 2-3 years, will have implications for crude demand in general, but could weigh more heavily on lighter gradessuch as Murban which yield more light end products such as naphtha. Asia is likely to witness a surplus regionally, capping gasoline refining margins in the region
4. Limited supplies support medium sours: Opec+ cuts, as well as US sanctions on Iran, continue to limit medium sour exports from the Middle East Gulf, at a time when rising US exports have increased the availability of light crude. This dynamic plays out in the Dubai basket where the medium sour grades glean supply side support, while the opposite is true for Murban, making the grade more vulnerable to downward pressure at times of tepid demand

Dubai basket crude volumes

New Realities of the US Crude Market

Crude exports from the US have gained a foothold in Asia and are indirectly influencing the Dubai benchmark through their competition with Murban. But the US Gulf has also been undergoing significant pricing transformation in the last two years. Production growth, especially in the Permian Basin, is driving increased exports. The Permian, which now represents a larger portion of the US crude profile, is expected to grow by nearly 8% through 2025, outpacing the overall US crude production growth rate of 5%. As US crude production returns to pre-COVID levels, more of this production is flowing directly to the Gulf Coast for refining and export, bypassing traditional hubs like Cushing, Oklahoma.

The move by the Intercontinental Exchange (ICE) in January 2022 to link their “HOU” contract, with the Magellan East Houston Terminal (MEH) and Echo terminals in Houston, while guaranteeing Permian quality WTI at both points, has meant Permian quality WTI can now be priced at the US Gulf directly, without any distortion from logistical bottlenecks at Cushing which had previously fed into WTI prices.

Europe, Asia drive USGC exports

‍Dubai in flux, US footprint to grow

The inclusion of Murban into the Dubai benchmark in January 2016 was a fateful decision with ramifications that have gone beyond the original intent of widening the physical base of the Dubai benchmark and capping values at times of intense buying. The light sour grade has at times been setting the floor for Dubai, being delivered as the cheapest grade in the basket. As such times, question arise as to whether Dubai remains a market for mediums sour crude or a mere reflection of light sour Murban fundamentals.

Looking ahead, the influence of US crude in global oil markets is expected to grow, further impacting the dynamics of the Dubai benchmark. As US Gulf prices become increasingly tied to the waterborne market, this trend will continue to shape the future of oil pricing, particularly for light crude.

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Reza Amanat, Managing Director, Asia