Middle East crude market sentiment bearish

Sentiment in the Middle East crude market was bearish on Wednesday as Japan took additional supplies from Saudi Arabia in July, while values of competing Russian Espo declined.

A backlog of Espo cargoes following the closure of the arbitrage window from Kozmino to the US West Coast is putting pressure on differentials of the Russian grade.

The oversupply, combined with increasing output from Middle East producers, is also keeping the discount of Dubai crude to Brent wide. A European refiner is even aiming to take Dubai-linked Espo crude to the Mediterranean as Dubai remains weak.

Repsol bought an Espo cargo for loading July 18-22, three traders said, although it was not possible to determine if the Spanish refiner still held it or had sold it to Shell.

Espo was last week offered in the Mediterranean, and traders said this was Repsol's cargo. Most were sceptical that the economics of the arbitrage would work as freight rates would have to remain low.

BP's joint venture in Russia, TNK-BP, sold a 100,000-tonne cargo of Espo Blend crude via tender for loading at the end of July or the beginning of August at a lower premium than the previous month.

TNK-BP sold the cargo for July 30-August 2 loading at $3.60-$3.70 a barrel above Dubai quotes to Phibro, traders said, although this could not be confirmed.

Saudi Arabia, the world's top crude exporter, will supply additional supplies to one Japanese buyer on top of contractual volumes in July, an industry source familiar with the matter said on Wednesday.

Saudi Arabia had offered more crude to Asian refiners for July, but interest seems to have been lukewarm, trading sources said, adding that "just a handful" of refiners are expected to take "not big volumes" on top of that agreed in long-term contracts.

Five buyers in China, South Korea and Taiwan rejected the offer, the sources said. The first source indicated the additional volumes to Japan are limited, adding that very few buyers seemed to have the appetite for more oil next month, with spot trading for July already over.

The Brent/Dubai Exchange of Futures for Swaps (EFS) for August rose 14 cents to $6.24 a barrel at 0830 GMT, Reuters data showed. The front-month EFS on June 15 touched $9.20, the highest intraday value since the spread reached a record of almost $12 in October 2004.

August Oman traded on the Dubai Mercantile Exchange (DME) climbed 20 cents to a premium of 71 cents a barrel to Dubai swap quotes at 0830 GMT, using the settlement price for DME futures, the ICE one-minute marker for Singapore and the Brent-Dubai EFS as calculated by Reuters.

Japan's commercial crude inventories last week rose 1.3 percent, nearing a 31-month high marked earlier this month, as crude throughput climbed for the second week in a row, industry data showed on Wednesday.

Vietnam plans to change the pricing formula for its crude to partly dated Brent, following Malaysia, as both seek a more liquid benchmark in line with international crude prices, two industry sources with direct knowledge of the matter said on Wednesday.

South Korea's second-largest crude oil refiner GS Caltex has asked state-run Korea National Oil Corp (KNOC) to release 870,000 barrels of diesel from a reserve ahead of an expected retail price hike, officials of both companies said on Wednesday.

Opec member Kuwait is producing an average of 2.5 million to 2.7 million barrels per day (bpd) of crude, its oil minister said on Monday.

Gas oil's July crack weakened $1.10 to a premium of $17.80 a barrel to Dubai crude, falling under $18 a barrel for the first time since May 30, while the August crack was $1.08 lower at $18.17.

Naphtha CFR Japan's August discount to Brent crude narrowed 45 cents to $7.74, while September's crack was 46 cents narrower at a discount of $6.92 a barrel.

Fuel oil's July crack climbed 47 cents to a discount of $6.32 a barrel to Dubai crude, while the August crack narrowed 48 cents to a discount of $7.07 a barrel.

August ICE Brent was at $111.49 a barrel at 0830 GMT, down $1.03 from Tuesday.