(Bloomberg) -- China’s lackluster economy is helping to make oil from the US and Europe increasingly uncompetitive in Asia, where refiners are set to favor supply that’s closer to home.
A closely-watched oil market gauge measuring the premium of Europe’s Brent crude over Dubai — known as Brent-Dubai EFS — rose to its widest since early March in recent days, according to data compiled by Bloomberg. A related swaps contract that normally moves a handful of cents a day has gained almost a dollar in the past two weeks.
The sizable swings have been the talk of the oil market in recent days. Traders said the widening will make Middle Eastern crude more attractive to Asian refiners, and longer-haul flows from Europe and the US less appealing. The move stems from twin forces — strength in European barrels and a collapse in some parts of the Dubai market.
In recent years, Dubai crude has generally been gaining against the global Brent benchmark as OPEC+ supply cuts limit the availability of Mideast barrels, while supply from producers outside the group rose.
This month’s moves mark a stark turnaround in that trend as an extended economic slowdown in China limits the nation’s demand for additional crude at a time when European oil field maintenance has crimped the region’s own supply.
The EFS is a proxy for the strength of Atlantic Basin oil markets relative to Asia, where the bulk of Middle Eastern oil is sold. Open interest on Brent-Dubai swaps contracts is the highest since October, indicating large positions in that part of the market.
At least part of the move has been driven by traders exiting bullish wagers that the Dubai market would recover, several traders said. So-called timespreads, which gauge market health, have slumped in that market in recent days.
North Sea markets were also powered higher in recent months by a surge in activity on a widely-referenced pricing window, traders said. Trafigura Group and Gunvor Group were heavily bidding for grades of physical crude that define Dated Brent last month, driving up the premiums for those varieties.
Additionally, strength in the US market from the threat of wildfires to Canadian output and imports being diverted elsewhere by a new pipeline contributed to bullishness for West Texas Intermediate, traders added. WTI’s strength was prompting shipments to stay in the Americas instead of moving to Europe, they said, further lifting Brent.
Across Asia, an extended economic slowdown in China, the region’s top importer, has weighed on the sentiment for Dubai crude, with its refineries returning from planned maintenance works at a slower-than-normal pace. The nation’s decades-long boom in oil processing is expected to falter this year, according to a Bloomberg survey, while run rates at private refineries in Shandong province hovered near the lowest since the pandemic.
(Updates first chart.)
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