The Brent-Dubai spread continues to narrow and oil trade routes are quietly changing

　　One of the hottest trades in the oil market this year is continuing, which has the potential to drive spot oil price volatility and oil trade flows.

　　Swap spreads for Brent crude in London and Dubai crude in the Middle East have fallen sharply, according to PVM Oil Associates. This is a dramatic shift from the start of the year and normal trading patterns, which were at $3 in January and have now fallen to $1.60.

　　Relative price fluctuations in key global benchmarks could prompt oil trade around the world to rerouted, in which case it would be more profitable to sell oil produced in and around the Atlantic Ocean to Asian markets.

　　Brent crude, the global benchmark, typically trades at a premium to Dubai because its lower sulfur content and lighter density tend to produce higher quality refined products. But in recent months, production cuts by Saudi Arabia (KSA) and Russia (RUS) have tightened the market for medium-sour crude, traders said. In addition, they added, Saudi officials have also raised the price of the Arabian Light grade several times this year, further supporting the benchmark price in Dubai.

　　Instead, the supply of physical Brent crude, which is linked to the London futures market, has surged since the inclusion of US crude in the Brent basket. This has resulted in large volumes of US West Texas Intermediate crude being supplied and delivered to the benchmark, affecting the valuation of Brent crude relative to the global grade.

　　These changes are in line with the difference between the two levels and the surge in trading activity for Dubai-related contracts. The Brent-Dubai spread hit a record high last month and is 67 per cent higher than a year ago.