Oil major Royal Dutch Shell has gone on a buying spree for Dubai crude this month, pushing up prices for the benchmark Middle East grade, which traders say will hurt Asian refiners already burdened with record costs.
The latest flurry again called into question the role of Dubai as a benchmark for some 12 million barrels per day (bpd) of crude heading to Asia, as its output has slid well below 100,000 bpd and it is more exposed to price distortions, traders said.
Shell has so far this month bought 162 Dubai partials, or 25,000-barrel lots, more than the total number of trades in the first seven months of 2007, data from pricing agency Platts showed. The volume is equivalent to 140,000 bpd, well above the crude's current 80,000-90,000 bpd output.
"Dubai will go higher than its value this month. It should normally be lower than Oman," a trader with a refiner said.
Traders said Shell's strategy was unclear as it could be linked to a long Dubai paper position, but it was also hurting the company's refining system in the region.
"Shell is flexing its muscle. I am not sure what their ultimate motive is," said a trader with a bank.
Shell and the firm's crude traders declined to comment.
Middle East crude is priced off quotes for Dubai from Platts, averaged with Platts prices for Oman crude. So, higher Platts Dubai assessments will curtail refining margins for Asian refiners that import Middle East crude, traders say.
Platts uses partials trade to set its daily Dubai assessements.
Refiners usually value Dubai crude anywhere between 40 cents and $1 a barrel below Oman, but the grade is now assessed at around parity to Oman crude.
Margins for refining Dubai crude at simple Asian plants have dropped to 39 cents a barrel in the past five days, down from $1.55 in August, Reuters data show.
The higher price expected for Dubai crude means refiners may pay around 70 cents per barrel more for their crude this month, a trader estimated. Sour Dubai crude is already up 34% this year, along with a 39%-rally in benchmark US light crude to record highs above $81 a barrel on Tuesday.
Middle East not that strong
Dubai's stronger price is part of a wider trend that has seen the Middle East crude market strengthen considerably ahead of planned maintenance in Abu Dhabi, which could cut supplies by up to 810,000 bpd for about three weeks, starting end-October.
November cargoes for other Middle Eastern grades have traded at strong differentials, with both Qatar Marine and Abu Dhabi crude fetching rare premiums of more than $1 a barrel to their respective official selling prices.
Shell's purchases leave Dubai cash crude assessed at around a premium of $1.30-1.50 to Dubai quotes, against a discount about a month ago.
"This is too strong. I didn't think the Dubai cash market can be so strong," a trader said.
Sellers that trade 19 partials with a buyer, in this case Shell, can declare delivery of a physical cargo to settle their positions.
Shell has already accumulated six physical cargoes so far this month through that system: two Dubai, two Upper Zakum and two Oman cargoes.
This is the first time Shell is seen buying such a large amount of partials and the largest number of physical cargoes delivered via partials, over such a short period.
Shell may be holding a long position on Dubai swaps, some traders said. Dubai swaps are settled against the monthly average of Platts Dubai daily settlement.
Shell may also be drumming up support for the Dubai Mercantile Exchange's Oman contract, since proponents of the new futures contract say the lack of liquidity on physical Dubai crude is hindering its price discovery.
Dubai has long been criticised as benchmark for its lack of liquidity and Shell, the largest private equity holder of Oman crude, has long been seen a supporter of a larger role for Oman.
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