All signs point to weakness in the oil market

ICE Brent & WTI timespreads strengthened marginally last week and seem to have bottomed out for the time being. This was, however, not reflected in key indicators of the physical crude market on both sides of the Atlantic.

In fact large swathes of the oil market speak for relative weakness, from structure, to clean cracks, to (LS) fuel oil.  

June DFL remains under hefty pressure though July is more bullish. (Sparta Live Curves)

In the North Sea, CFDs remain under hefty pressure to the extent that the prompt remains in substantial contango, bringing with it the potential to draw more volumes to the area temporarily.

MEH WTI assessments are also contangoed while July-loading waterborne assessments have remained markedly stronger than June-loaders, for now.

Nigerian FOB premia also came under pressure w-o-w. With the EFS also weaker, the picture in terms of arbs for both WTI and the North Sea to Asia remains largely unchanged w-o-w, i.e. substantially more open on paper than in April.  

Arbs East remain substantially more economical than in early Q2. (Sparta Global ARBS – ARBs Comparison)

The hope is that crude demand picks up from here, but the fact is that both indications of seaborne flows and physical pricing continues to paint a weak picture.

Poor refinery cracking/conversion demand is also being reflected in the fuel oil market with 0.5% cracks plummeting over the last 10 days, mirroring relative weakness in both gasoline and diesel cracks (relative, since outright levels remain in fact fairly strong).

Until we see initial signals that this weakness can be cleared, any relative strength in e.g. ICE spreads may be sold quickly again, absent geopolitical issues.  

Even on the heavy crude side of the market the trends are somewhat weaker: MEG spot premia remain under a little pressure (in line with a weaker Dubai structure); spot Basrah Heavy FOBs fell this week amid a relative surplus of June-loading cargoes; heavy LatAm FOBs slowly cooled; Johan Sverdrup premia were also bid lower on Friday.

All that despite hefty US imports (and net-imports) as well as a substantial decline in Russian crude exports over May. PADD-3 crude stocks are now up 17 million bbls y-o-y.  

If the repricing in benchmark margins is in fact taking its toll on refinery utilisation on economic grounds, as has been talked about for some time already, then what could change or what should be the first factor to shift to try to clear some crude surplus? An obvious one would be that baseload margins in e.g. the Far East need to be able to move higher, following their essential halving since April, albeit to still reasonable levels on paper.  

Product cracks would have to do some of the work here – clean cracks that is, since high sulphur FO cracks are going from strength to strength.

An initial hit to supply from the impact of weaker-than-expected runs, seasonal end-user demand strength, and potentially more conviction of further delays to e.g. Dos Bocas’ & Dangote’s ramps-up would all help.  

From the crude side, a substantial easing of major OSPs released in the coming days for July-loaders would also help and should be on the cards anyway given May Dubai structure vs April as well as these crudes’ relative loss of competitiveness vs the AB.

You may also argue that the Dubai market needs to weaken further from here, such that more speculative moves East for Atlantic Basin crudes (whose margins in Asia are actually much-improved m-o-m) are facilitated.  

As ever, the impact of Chinese buying could be a major boost.

However for now reports point to ample stocks in the country, built through the turnarounds season. That plus still relatively high outright prices (assuming this plays some role in general Chinese buying levels) point to the potential for further weakness from this corner of the market for now.

Baseload MEG margins in Asia have halved m-o-m, though Atlantic Basin margins into the Far East are actually much-improved. (Sparta Global ARBS – ARBs Comparison)

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