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.