Arbs East verging on open; but anaemic demand still weighing on crude for now

ICE Brent was held in the low 80s, but a steady drift lower coincided with the M1/M3 down to below $1/bbl for the first time in some weeks. The EFS in turn fell further, holding now at just above $1/bbl.

With CFDs substantially weakened vs April, North Sea arbs to the Far East thus continue to look substantially improved for late July delivery.

Forties – which has come under heavy pressure in recent sessions and which dragged down Brent FOBs with it late last week – is now landing at ‘only’ $1/bbl above Murban.

Some Med and Black Sea light sweets are similarly positioned in the East, with CPC Blend looking likely to be open against Murban for late July.

Forties and CPC look much more competitive against Murban for late July. (Sparta Global ARBS – Pricing Centre)

For medium crudes, a similar pattern can be seen for Johan Sverdrup, which is landing essentially level with spot Basrah Medium, as well as competitors in Latin America such as Tupi.

Guyana grades have been weakening but remain more expensive than JS in Asia for now.

Johan Sverdrup is competitive against spot Basrah Medium in Asia. (Sparta Global ARBS – Pricing Centre)

The upshot here is that, as said last week, while arbs look substantially better to the Far East than a month ago, the question remains whether marginal Asian demand is there to soak up additional cargoes.

On the basis of turnarounds that are still peaking in Asia at the moment, reports of weaker runs in China, a substantial step change lower in margins (if not into real/traditional run cut territory but potentially delaying crude purchasing), and even a m-o-m cooling in spot MEG premiums (which admittedly are partly related to weaker Dubai structure), it is difficult to argue Asian demand is looking particularly strong at the moment.

Asian buying should presumably soon pick up for summer deliveries, but we would not rule out a more diminished upside here on the basis of some of the above.

Another piece of evidence for poor demand might be the USGC, where waterborne values against MEH have plunged to parity for late June loaders, and where MEH vs Cushing has fallen some 60 cents vs the recent May 1^st peak.

That plus a steady drop-off in TD25 is helping WTI compete with Forties in NWE for early July – at least on a Suez – and has helped TI/Brent spreads narrow a good 30 cents w-o-w.

WTI & Forties are competing hard for landing in early July in NWE. (Sparta Global ARBS – ARBs Comparison)

Pressure on the Gulf Coast has improved the WTI arb to the Far East despite what has been a steady run-up in VLCC rates/TD22 since late April, and now sees WTI landing at parity against Murban, both on a VLCC, for August delivery.

So, as with the North Sea, WTI looks to be pricing to clear, but with demand seemingly lacking both East and West. Perhaps this is partly what is driving MEH premiums lower, so that already-high PADD-3 stocks are allowed to clear a little over May even though Wink-Webster maintenance is already on the horizon for June.

What remains an interesting factor to watch is the WAF market which on the face of it remains somewhat expensive in many regions, basis landed values. Despite this, there are reports that the overhang of Nigerian cargoes has slowly begun to clear over the last few weeks.

There do seem to be pockets of competitiveness when looking at margins, namely Qua Iboe margins in both the Med and WCI, which are reasonably healthy against WTI, for example. In medium sweets, Bonny margins have flipped to a premium to Johan Sverdrup in the Med.

Bonny landed values are some of the cheapest out of all medium sweets into the Far East for late July.

The WAF overhang seems to have gradually cleared despite reportedly subdued interest out of China, and we would probably argue that WAF has started to position itself reasonably well in advance of what should be at least some Asian pick-up, particularly following a substantial cooling in flat prices.

Qua Iboe margins in WCI are on par with WTI. (Sparta Global ARBS – ARBs Comparison)

Bonny light margins are higher than North Sea medium sweets in the Far East. (Sparta Global ARBS – ARBs Comparison)

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