Crude oil price spread realigned

Crude oil price spread realigned

SINGAPORE (Reuters): Price relationships between Asian crudes and global benchmark Brent changed dramatically in the first quarter, but are expected now to resume a more traditional course, analysts said yesterday.

"The realignment of the spread happened in April, and is likely to be sustained this year," said John Russel, managing director of Bangkok-based Petroleum Economics Limited (PEL).

In the first quarter Indonesia's Minas crude -- the region's heavy grade benchmark -- opened a big discount to Brent, while a traditional premium for Tapis -- the region's light grade benchmark -- dropped sharply.

Gordon Kwan, energy analyst at Daiwa Securities in Hong Kong, said the change in the spreads was not a surprise.

"There has been higher demand growth in the west, from Europe and U.S. for Brent crude, while Asia was suffering from its financial turmoil. So its relative demand growth for Asian crudes was not as robust," he said.

The change in prices weakened Asia's traditional role as a net importer of crude, allowing Asian exports as the global downturn in energy demand was exacerbated by Asian economic turmoil.

With price spread now back in line, the export window has effectively been closed, analysts said.

In the first quarter, the Indonesian Minas discount to Brent averaged around $1.50 per barrel and as deep as $3.00. This month, the Brent/Minas spread narrowed to around $1.00, more in line with its traditional spread.

The Malaysian Tapis premium slumped as low as 10 cents during the first quarter, but has since moved out again to around the $1.20 average.

PEL's Russel said Asian crude prices were particularly hit by the OPEC decision in November to raise its output ceiling 10 percent to 27.5 million barrels-per-day (bpd) and by the regional economic crisis which intensified in the early months of this year.

"The weak Asian crude prices were exacerbated by crude payment problems in South Korea and Thailand and the running down of legal reserves in these countries," Russel said.

The price slump prompted Asian crudes west, mostly in the form of light Asian crudes heading into the U.S..

In February, over three million barrels of light Asian grades were sold to the U.S., compared to just 800,000 barrels that moved in the same month last year.

But there were less arbitrage opportunities for the heavier Asian grades, which did not fit too easily with refinery slates outside the region.

Price pressures eased this month following the March agreement by global producers to cut around 1.5 million barrels per day from world supplies.

"It's a reaction to OPEC's cutback pledge. If Mideast supplies decline there would obviously be more demand for Asian crudes," Daiwa's Kwan said.

Analysts said the weak Asian crude price in first quarter would prove to be an aberration of the historical price trend.

But at the same time, they said the differentials between heavy Asian crudes and Brent were unlikely to return to the very narrow levels of 1997.

"In most parts of 1997, there was still a fair amount of demand from Asia and a number of new refineries in Korea and Thailand, the narrow spread was almost an anomaly," Kwan said. For most of last year, the Minas price was near parity to Brent, they added.

The analysts predicted that the existing spread between Brent and Asian crudes would remain steady, mainly because they did not foresee a significant rise in the Brent price.

"Because of the cutbacks, Brent crude price will not get any worse," said Russel. "But fundamentally, we don't expect the market to be much better."

In London, the price of OPEC's basket of seven crudes rose to $13.28 a barrel on Tuesday from $12.98 a barrel on Monday, the OPEC news agency said quoting the OPEC Secretariat.

The basket comprises Algeria's Saharan Blend, Indonesia's Minas, Nigeria's Bonny Light, Saudi Arabia's Arabian Light, Dubai of the UAE, Venezuela's Tia Juana and Mexico's Isthmus.