Spot premiums for Middle Eastern crude benchmarks returned to levels seen before the Iran war this week as ample supplies weighed on the market, while cooling refining margins in Asia slowed buying interest.
Middle Eastern producers ramped up crude exports in September and October, which J.P.Morgan analysts said has created a surplus, despite rising attacks on vessels transiting the Strait of Hormuz.
The wave of supply has depressed Middle Eastern crude benchmarks this week to their lowest premiums since July, when an initial agreement to end the US-Israeli war with Iran enabled more Persian Gulf oil exports through the Hormuz strait.
Dubai's cash premium to swaps slumped to 65 cents a barrel on Monday, the lowest since July, before recovering to $1.55 a barrel on Thursday, Reuters data showed.
Oman's premium dropped to 95 cents a barrel on Tuesday, the weakest since July, before nudging up to $1.76 on Thursday, Reuters data showed. These premiums marked a big drop from last month's average of about $8 a barrel.
Unsold December-loading cargoes of Oman, Murban and Iraqi crude from last month's trading cycle pressured spot premiums, three traders in the market said.
Exports rose in September, with the United Arab Emirates' Murban crude reaching a record of 2.4 million barrels per day before easing to around two million bpd in October, Kpler analyst Naveen Das said. Murban exports were between 1.2 million and 1.5 million bpd in January–February before the war.
UAE's crude output rose to above 3.9 million bpd in September, above its pre-war level of 3.4 million bpd, Das said.
"We have revised up our production figures for Saudi Arabia, Iraq and Kuwait as we are seeing more loading and a depletion of inventories," he said.
Middle Eastern crude flows, including via bypass pipelines, averaged at 17.1 million bpd in September and 16.3 million bpd in October, Kpler data showed. Iraqi flows jumped to 3.35 million bpd in October, only 150,000 bpd under pre-war levels.
At the same time, sellers of West African and Brazilian crude have been offering steeper discounts to Chinese buyers to offset high freight costs, intensifying competition with gulf grades, two of the traders said.
Several independent refiners in China's eastern Shandong province last week snapped up eight million to 10 million barrels of November-loading West African crude.
On demand, Asian refiners are unlikely to increase crude purchases unless refining margins improve, one of the above people said.
China released last week a larger-than-expected fourth batch of fuel export quotas, which raised expectations of increased supply in Asia, weighing on refining margins.
Asian refiners' profit for gasoline slumped to its lowest since late February, while margins for 10-ppm sulphur diesel were slightly above $60 a barrel, down from a record high of more than $87 a barrel in mid-September, LSEG data showed.
(Reporting by Siyi Liu; Editing by Florence Tan and Shilpi Majumdar)