Florence Tan

SINGAPORE, (Reuters) – Spot premiums for products in Europe and Middle East are at record levels this month. This is due to a rise in global prices. Refiners have taken up supply and producers struggle to keep up with rising demand.

Refinery margins in Asia are at their 2018 peak, as the demand for oil products is back to its pre-pandemic level or higher.

However, many producers of the Organization of the Petroleum Exporting Countries are running out of capacity due to the rapid rebound in global fuel use.

European oil refiners worried about possible sanctions against Russia if Ukraine escalates are looking for oil alternatives elsewhere in Europe, Africa, and the Americas. This tightening supply and pushes North Sea crude premiums up to new records, analysts and traders said.

Warren Patterson, head, commodity research, ING, stated that “it is largely driven through the strength of refinery margins and particularly the strength in mid distillates.”

The uncertainty in Russia is likely to play a role, as European refiners are hesitant about locking in Russian crude.

Spot premiums for North Sea, Forties, and Ekofisk crudes are at record highs, but Russian Urals has fallen to the steepest discount to Brent for Northwest Europe since COVID-19 in April 2020. Refinitiv data revealed.

Forties’ and Ekofisk’s Refinitiv data dates back to 1996, while Brents’ data was started in 2005.

Traders stated that due to the demand for quick supplies in Europe, Brent’s backwardation was increased to over $3 per barrel. The result sent ripples across Asia. The tight supply is evident in the fact that front-month prices are generally higher than future months in a market with a lower backwardation.

One trader based in Singapore said that the low margins of high-sulfur fuel oil have also reduced refiners’ valuations for Urals crude. He also stated that the fuel’s low profit has increased the gap between sweet crudes and sour crudes. Brent, for example, saw its premium to Dubai swaps rise to more than $6/barrel from 2013’s highs.

Brent-linked Brent prices from Europe and Africa remain out of the reach of Asian buyers, restricting their choices to Middle East and Russian grade Brent.

The strong demand for these grades pushed Middle East benchmark Dubai, spot premiums Abu Dhabi for Murban and Qatari al-Shaheen crude oil to new records this week. Meanwhile, Russian grades ESPO blend and Sokol are at their highest levels in more than two years.