Chinese Economic Downturn Increases Cost of American and European Oil

The declining Chinese economy is making oil from the United States and Europe increasingly uncompetitive in Asia, as refiners are likely to prefer supplies closer to home.

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Details
Significant Volatility
North Sea

Details

A closely watched oil market indicator, which measures the premium of Brent crude in Europe over Dubai crude – known as the Brent-Dubai EFS (Exchange of Futures for Swaps) – has widened to its highest level since early March in recent days, according to Bloomberg data. The related swap contracts, which usually move by a few cents daily, have surged by more than a dollar over the past two weeks.

Significant Volatility

The recent significant volatility in the oil market has been a major topic of discussion. Traders explained that the widening price differentials would make Dubai crude, traded in the Middle East, more attractive to Asian refineries, while making long-haul crude flows from Europe and the United States less appealing. This shift stems from two main forces: the strength of European oil prices and the decline in certain parts of the Dubai crude market.

In recent years, Dubai crude has generally strengthened against the global Brent benchmark, with the availability of Middle Eastern barrels restricted by OPEC+ supply cuts, while supplies from non-OPEC producers increased. This month’s movements mark a strong reversal of this trend, as China’s prolonged economic slowdown limits the country’s additional oil demand, while maintenance activities in European oil fields have reduced regional supplies.

The Brent-Dubai EFS is an indicator of the strength of oil markets in the Atlantic Basin versus Asia, where the bulk of Middle Eastern oil is sold. The number of open contracts on Brent-Dubai swaps has reached its highest level since last October, indicating significant investment in that part of the market. Several traders attributed at least part of this movement to traders exiting bullish bets on the Dubai market’s recovery. The so-called time spread differentials, which measure market strength, have weakened in the Dubai market in recent days.

North Sea

Traders noted that North Sea markets have also contributed to the recent rise, with increased activity during the wide-ranging pricing window. Last month, Trafigura and Gunvor made large purchase bids for physically traded crude grades that set Brent’s price, boosting price premiums for those crude grades.

Additionally, traders pointed out that the strength of the U.S. market, driven by wildfire threats to Canada’s production and the diversion of imports via a new pipeline, has also supported West Texas Intermediate (WTI) crude. They noted that the rise in WTI has kept shipments within the Americas rather than moving to Europe, further boosting Brent prices.

Across Asia, the long-term economic slowdown in China, the region’s largest oil importer, has affected Dubai crude outlooks. Chinese refineries resumed operations after scheduled maintenance at a slower pace than usual. According to a Bloomberg survey, the decades-long oil processing boom in the country is expected to decline this year, while private sector refinery operating rates in Shandong province have approached their lowest levels since the pandemic.

Chinese Economic Downturn Increases Cost of American and European Oil

Chinese Economic Downturn Increases Cost of American and European Oil

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