Record trading of Dubai crude by two Chinese state companies this month on a decades-old oil pricing system has pushed the benchmark higher, even as other grades are being pressed lower by a global glut.
The strong Dubai trade has forced Middle East producers to raise official selling prices, driving Asian buyers to seek cheaper oil elsewhere or cut refinery runs due to low margins.
Chinaoil and Unipec, trading units of PetroChina and Sinopec, respectively, traded record volumes of crude in early August on pricing agency Platts' market assessment process. This pushed up prompt physical Dubai prices against future months, creating a backwardated market structure usually associated with supply shortages.
In contrast, a global oil glut has kept Brent and West Texas Intermediate crude futures in contango this year, and most analysts see the surplus lasting well into next year.
"Platts should be seriously concerned as I am sure they want a fair market price, and the Dubai market now seems to become dysfunctional," said Oystein Berentsen, managing director of crude oil at Singapore-based Strong Petrochemical.
Higher Dubai-linked crude prices and lower oil product values squeezed refining margins in July to the lowest since October 2014, forcing some Asian refiners to cut output.
A Platts spokesman said the firm "is confident in its Dubai price assessment methodology and its ability to produce a price assessment reflective of true market value".
Critics of Platts' Market-on-Close, or MoC, process for Dubai crude say the problem is that it is easier and less risky for buyers to participate in the market than it is for sellers.
The MoC requires delivery of a 500,000-barrel cargo for every 20 Dubai trading lots sold to a single counterparty. That means sellers have to hold oil at one of the approved loading points to participate in the market - with the risk in any month that barrels may go unsold if no single buyer agrees to take enough partials to make up a loading.
Thus, there are often more buyers than sellers, and that can push the market higher relative to market fundamentals.