Sunday, May 24, 2009


Singapore - The Middle East crude oil market will hold firm in the coming week as the trading month for July cargoes draws to a close, with chatter from the Organization of Petroleum Exporting Countries likely to further lend support.

OPEC, which counts six Middle East producers among its 12 members, will meet Thursday to discuss policy at a time when benchmark oil futures have climbed above $60 a barrel despite record inventories and lingering questions over the prospects for a global recovery in demand.

The group, which pumps 40% of the world's crude, isn't expected to hold back more output as a result, although hawkish members including Iran can be counted on to talk up prices.

"They'll probably maintain cuts and tighten compliance (to quotas)," a South Korean refinery official said of OPEC's recent pledge to reduce supply.

Even before OPEC ministers stream into their Vienna gathering, Middle East high-sulfur or "sour" crude has already drawn strong buying interest, a trend that's likely to continue in the near term.

That's because profit margins for fuel oil, the primary product from processing Middle East crude, has strengthened, just as refineries are filling their books for the start of the third quarter - when plants reopen after seasonal maintenance.

Firm Demand Despite Arb

Asia's reference fuel oil crack spread, calculated as the discount of Singapore high-sulfur fuel oil to Dubai crude swaps, was quoted Friday by a broker about minus $5 a barrel for June, easing only modestly from the previous week.

This means Middle East supplies will likely remain in demand, even if favorable arbitrage economics present Asian importers the option of shipping home low-sulfur or "sweet" crude from the Atlantic basin.

The premium of London Brent futures to Dubai swaps, or the exchange-of-futures-for-swaps, was valued by another broker at a narrow $1.05 a barrel for July, less than half the spread that would encourage West-to-East supply.

"(Supply from) Saudi Arabia, Kuwait and the United Arab Emirates will do well," the refinery official predicted.

Meanwhile, a handful of July-loading cargoes, mostly of Abu Dhabi origin, remain uncommitted, but offers in the coming days probably won't be reduced.

These include light sour grades such as Lower Zakum and Umm Shaif, which changed hands in recent days at relatively strong premiums of nearly 20 cents a barrel to official selling prices - a $100,000 markup on every cargo.

Oil majors are expected to absorb unsold cargoes internally rather than reduce their offers significantly, traders say.

On May 28, look out for a new round of monthly term prices, starting with trade calculations for Malaysia's light sweet benchmark Tapis crude, to be priced retroactively for May.

The Oman OSP for July, which comes after the settlement of futures contracts traded on the Dubai Mercantile Exchange, will be finalized May 29.

That's on track to rise to a seven-month high above $56 a barrel.

Crude steadies on dollar, but econ doubts linger

Crude oil futures steadied Friday in Asia on a continued dollar weakness, although sentiment remained under pressure on concerns over the health of the global economy.

Oil traders were reluctant to bid up prices aggressively, with regional share markets declining, after the U.S. Labor Department Thursday reported a record number of jobless claims and amid speculation the country's top credit rating may be in jeopardy.

On the New York Mercantile Exchange, light sweet crude futures for delivery in July traded at $61.52 a barrel at 0707 GMT, up 47 cents in the Globex electronic session.

Nymex reformulated gasoline blendstock for June rose 233 points to 182.30 cents a gallon, while June heating oil traded at 153.63 cents, 69 points higher.

Oil traders are still taking direction from various readings of the economy amid uncertainty over the outlook for global demand.

Overnight, financial markets were hit after Standard & Poor's put the U.K.'s credit rating on negative outlook because of extra obligations taken on by the government to tackle the recession.

While the recent rally in U.S. equities may have encouraged buying by some long-only index funds, it remained unclear if the uptrend in oil prices represented a longer-term return to positive performance.

"Both industrial metals and energy markets look vulnerable to a deterioration in sentiment toward risky assets over the coming weeks as positive correlations with equity markets have strengthened recently," analysts at Barclays Capital, led by Gayle Berry, said in a report.

"In addition, key markets in sub-sectors such as oil and copper look as if they may have moved ahead a little faster than is justified by the current state of market fundamentals."

The U.S. Energy Information Administration Wednesday posted a second weekly drop in the country's crude inventories, although stocks remained at their highest levels since 1990.

Still, some upside support may be possible as traders turned their focus to the gasoline market in the lead-up to the long Memorial Day weekend, which kicks off the peak U.S. summer driving season.

U.S. gasoline stockpiles have slipped below the five-year average level, according to the EIA.

Nymex electronic trading will continue over Monday's U.S. Memorial Day holiday, although the pit session will be closed.

Meantime, oil prices may also find support from continued dollar weakness as investors seek shelter by buying hard assets.

The greenback traded at Y94.18 after falling to Y93.91, while the euro was up at $1.3942, from $1.3910.

"We continue to view this weakening dollar trend as an important force in enticing passive capital into the long side of the crude futures as a longer-term asset play or inflation hedge," Jim Ritterbusch, president at trading advisory firm Ritterbusch and Associates, said in a note to clients.

At 0707 GMT, oil prices on London's ICE Futures exchange also pushed higher.

Brent crude for July rose 53 cents to $60.46 a barrel, while June gasoil changed hands at $486 a metric ton, chalking up $9.25 from Thursday's settlement.