Bloomberg: Shell Buys Dubai Crude, Boosting Demand for Oman, Rival Grades

By Nesa Subrahmaniyan and Christian Schmollinger

Sept. 19 (Bloomberg) — Royal Dutch Shell Plc, Europe’s biggest oil company, has bought more Dubai oil than the emirate produces in a month, boosting demand for similar Middle Eastern varieties from Oman and Abu Dhabi.

Shell has purchased 4.1 million barrels of the grade for November loading through the Platts trading system, said Paul Young, Platts’s executive oil-pricing editor in Asia. Dubai pumps about 2.7 million barrels each month. Alexandra Wright, a Shell spokeswoman in London, wouldn’t comment.

Prices of Dubai and Oman crude, the two Middle East benchmarks, rose more than 9 percent this month as Shell bought cargoes. Sellers who can’t obtain enough of the Dubai grade are allowed to deliver Oman or Abu Dhabi’s Upper Zakum varieties instead, to prevent a squeeze in the market.

“Shell’s buying is an enigma,” said Ehsan Ul-Haq, head of research at Vienna-based PVM Oil Associates GmbH. The “buying spree” pushed Dubai to a premium of 7 cents a barrel over higher-quality Oman crude on Sept. 11, he said, citing data from Argus Media.

Dubai was almost $1 cheaper than Oman oil last month, and last traded at a premium on Feb. 23.

The premium of November-loading Dubai cash crude over December has widened to $1 a barrel from a discount of 20 cents a barrel on Aug. 31, according to data provided by PVM. Dubai crude ended yesterday at $74.34 a barrel and reached a record $74.39 on Sept. 17. The discount for Dubai compared to Brent crude was $2.59 a barrel, down from a peak of $7.22 in July.

Phibro, J. Aron

Dubai crude is trading at a steeper backwardation this month, partly because of Shell’s buying. Backwardation means oil for near-term delivery is more expensive than in subsequent months.

Companies that sold Dubai oil to Shell this month include Phibro Inc., the commodities-trading unit of Citigroup Inc., J. Aron & Co., the commodities-trading unit of Goldman Sachs Group Inc., Merrill Lynch & Co., SK Energy Ltd., Morgan Stanley, Total SA and China United International Petroleum & Chemicals Corp., the trading unit of China Petroleum & Chemicals Corp., according to Platts.

Dubai’s oil production has dropped by about 75 percent in a decade, to 90,000 barrels a day, reducing the number of 500,000- barrel cargoes loaded each month to about five. This prompted Platts to introduce a system, allowing trading in smaller, 25,000-barrel lots, known as partial cargoes for delivery two months forward, to boost liquidity.

Under the system’s rules, when the same buyer and seller agree to trade 19 or more of the forward partial cargoes, they must consolidate the agreements into one physical cargo. Shell has bought two Dubai cargoes in this manner from Phibro.

Shell Dominates Buying

Total last week agreed to deliver an Oman cargo instead of Dubai crude, the first time the grade has been chosen as a substitute since May 2004, according to Platts. The Paris-based company agreed Sept. 17 to deliver a cargo of Upper Zakum, according to Platts, a unit of New York-based McGraw-Hill Cos.

Yesterday, SK Energy Ltd. declared that it would sell a cargo of Upper Zakum to Shell and China United International Petroleum & Chemicals Corp. agreed to provide a cargo of Oman.

The options to deliver alternative grades have been in place since 2001 and “operate as relief valves when demand exceeds supply for a particular crude oil,” Platts’s Young said.

Shell also bought a 500,000 barrel Dubai cargo in the spot market from Mitsui & Co., Platts said in a report last week.

Bloomberg, the parent of Bloomberg News, competes with Platts, a unit of New York-based McGraw-Hill Cos., in selling information to the oil industry.

Qatar’s Marine

Prices for Abu Dhabi’s Murban and Qatar’s Marine grades gained because of Shell’s purchases, PVM said. The premium for cargoes of Murban rose last week to a record $1 a barrel over the government’s set price, PVM said. Qatar Marine also traded at a premium of $1 a barrel.

Shell paid an average price of $72.13 a barrel for loading in November and $67.19 for October, according to Bloomberg’s calculations based on Platts data. Dubai crude gained 3.8 percent in the week ended Sept. 14, and Dated Brent, the European benchmark, rose 1.7 percent in the same period.

To contact the reporters on this story: Nesa Subrahmaniyan in Singapore at [email protected] ; Christian Schmollinger in Singapore at [email protected] .

Last Updated: September 18, 2007 12:08 EDT

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