A recent surge in West Texas Intermediate crude prices (WTI) that pulled Brent crude futures higher has shut arbitrage routes for U.S crude to Europe and Asia and is preventing oil from the Atlantic Basin from heading east, traders said.
The WTI price surge, driven by OPEC+ supply cuts led by Saudi Arabia and falling U.S. shale oil production, is altering global trade flows by keeping U.S. oil in the country and driving up demand and prices for other oil imported by Europe and Asia.
WTI crude futures jumped more than $2 a barrel on Tuesday, pulling up Brent as well, before easing as investors took profits. Brent settled 9 cents lower at $94.34 a barrel with WTI settling down 28 cents a barrel at $91.20.
Previously, the recent price moves had widened prompt month spreads for both contracts in backwardation. ,
The backwardation - where front-month prices are higher than those in future months - indicates tight supply.
Brent's strength also widened its premium to Middle East benchmark Dubai which hit a six-month high of $2.74 a barrel on Tuesday, LSEG data showed.
This was more than double the previous day's Asia close and prompted traders to cover short positions, the sources said.
"The arbitrage into Europe and Asia from the U.S. is now closed," a Singapore-based trader said.
"I think it's down to OPEC+ actions, they drained the U.S. by not sending oil there."
The widening of the Brent-Dubai spread makes crude produced in the Atlantic Basin more expensive for Asian refiners who will now turn to the Middle East, traders said. Expectations of stronger demand have pushed spot premiums for Middle East crude such as Oman and Murban to multi-month highs.
U.S. crude's discount to Brent on Tuesday was at its narrowest since August at $3.49 a barrel. A narrower spread between the two benchmarks discourages foreign buying of U.S. crudes.
Spot prices for U.S. crude grades have also weakened. Mars Sour traded on Tuesday at a $1.70 discount to U.S. crude futures , its largest discount since March.
Saudi Arabia and Russia this month extended a combined 1.3 million barrels per day (bpd) of supply cuts to the end of the year as part of a move by the Organization of the Petroleum Exporting Countries and their allies, known as OPEC+, to reduce supply and support prices.
The International Energy Agency has warned of a substantial market deficit through the fourth quarter.
Australian bank ANZ said OPEC+ production cuts are likely to push the market into a 2 million bpd deficit in the fourth quarter amid robust global demand growth.
