The relationship between two major oil benchmarks is charting an unexpected course as U.S. sanctions take Iranian crude out of the market.
As demand for alternative Middle Eastern supply increases, regional marker Dubai crude has reason to strengthen. Yet it’s weakening against London’s Brent — an oil grade with very different chemical characteristics that’s used to price barrels from Europe to Africa.
Brent’s gaining more because futures and derivatives linked to it are accessible to an array of financial investors and traders via a highly liquid market, compared with relatively niche over-the-counter and clearing-house platforms for Dubai. So broader concerns over a potential supply crunch are being reflected to a greater extent in the London marker.
“With the disappearance of Iranian oil, Dubai should be stronger but Brent is outperforming,” said John Driscoll, the chief strategist at JTD Energy Services Pte. “Speculators such as funds, index managers, traders and even oil majors could be taking positions in the Brent complex that includes physical and derivative instruments. If you’re going to play big, this is the market to do it.”
Investors’ bullish bets on Brent have risen more than 35 percent over the past month in the lead up to the U.S. renewal of sanctions on Iran’s crude exports, according to ICE Futures Europe exchange data. Prices are up about 40 percent in the past year and are near $80 a barrel.