The surprise OPEC+ cuts not only lifted international oil prices but also strengthened the bullish futures structure of the main Middle Eastern benchmarks, off which the major Gulf producers price their crude going to Asia.
The Dubai crude and the Dubai swaps have jumped and narrowed the gap with the price of Brent Crude after the shock OPEC+ announcement. Analysts are not ruling out the possibility that Dubai crude could move into a premium above Brent in the coming months with the Chinese reopening and the expected increase in imports in the world’s largest crude oil importer.
Dubai’s most active timespread has jumped to a backwardation of more than $1 per barrel, more than the Brent backwardation for a similar timespread, per data from PVM Oil Associates cited by Bloomberg.
Backwardation typically occurs at times of market deficit, and in it, prices for front-month contracts are higher than for those further out in time.
The biggest OPEC producers in the Middle East and several other members of the OPEC+ pact announced on Sunday a total of 1.16 million bpd of fresh production cuts. Saudi Arabia, OPEC’s de facto leader and top global crude exporter, will cut 500,000 bpd and said that the move was “a precautionary measure aimed at supporting the stability of the oil market.”
The voluntary production reductions include big cuts, beginning in May and lasting through the end of 2023, from the top Middle Eastern producers who typically export sour and more heaver varieties of crude.
Apart from Saudi Arabia, OPEC heavyweights Iraq, the United Arab Emirates (UAE), and Kuwait, plus OPEC’s Algeria and Gabon, and non-OPEC Oman and Kazakhstan, announced the 1.16 million bpd cut. That’s on top of Russia’s current 500,000 bpd cut which was extended until the end of the year.
From within OPEC, Iraq is set to cut 211,000 bpd of its supply, the UAE – 144,000 bpd, and Kuwait – 128,000 bpd. Added to the Saudi cut of 500,000 bpd, nearly 1 million bpd of supply from the Middle East will disappear from the market as of next month.