Brent strength retained for now while other global indicators of physical crude lag behind

Last week saw flat price advance further in what has been a very respectable cumulative gain in June to date.

Timespreads also advanced, particularly in ICE Brent. The market has a lot to contend with at the moment, be it geopolitics, elections, expectations of supportive Q3 crude balances, and even the formation of powerful hurricane Beryl in the Gulf of Mexico, which, this early in the year, helps underpin the notion of an active storm season ahead of us.

DFLs remain on an upward path. (Sparta Live Curves)

Nevertheless, short-term indicators in the physical crude market remain very much mixed as we noted last week.

The exception remains the Brent complex in the North Sea, as well as a few related Black Sea crudes such as BTC/Azeri, whose FOB premia have rocketed higher seemingly on localised demand.

BTC fob premia are on the rise. (Sparta Live Curves)

 The North Sea market has reportedly been subject to some interesting buying activity by major trading houses over the last few weeks, which presumably means that while we still should not write off Brent strength as an indicator of Q3 seasonal demand, we should be cautious of this signal particularly while other areas of the physical crude market are not exactly aligned.

From the perspective of our NWE region, WTI continues to land cheaply relative to important benchmark BFOET grades, even on an Afra.

This is reportedly helping spur substantial WTI flows to Europe. 

With Brent-linked crudes still looking very expensive in Asia, relative to Murban, we reiterate the call that the North Sea will need to correct absent the emergence of very strong localised buying of light sweet in Europe.

For paper, this would inevitably impact ICE timespreads as well, whose relative strength has helped propel the EFS back up closer to the $2/bbl mark.

WTI remains cheap in NWE. (Sparta Global ARBS – ARBs Dashboard)

On WAF diffs, another developing overhang of July cargoes, a wide EFS, and relatively expensive landed values in NWE suggest a necessary correction ahead.

However, there is one twist here in that for somewhat heavier WAF grades, such as Bonny, margins are looking relatively healthy, partly owed to their middle distillate yields which are markedly better than e.g. WTI. This is true of both complex and simple margins that we track.

WAF margins are fairly strong despite high landed values. (Sparta Global ARBS – ARBs Dashboard)

In the US, hurricane Beryl does not look likely to cause significant disruption from a purely oil market perspective, but the earliest Cat 4 storm on record – by some margin – necessarily firms the notion that this immediate post-El Nino storm season will prove disruptive to the oil market.

For now, however, EIA weekly data is bearish. US commercial crude stockchanges remain substantially off seasonality; in fact the US is building strongly when seasonally dictates the start of substantial draws (see chart).

For the time being, therefore, WTI’s relatively large discount in the North Sea needs to be “solved” by freight and physical Brent structure.

US commercial crude stocks are bucking seasonal trends. (Source: Sparta based on EIA)

On MEG premia – Murban remains the cheapest major light grade landing into the Far East. Much heavier Upper Zakum and spot Basrah Medium are landing essentially on par with Murban itself.

Brent-linked crudes are completely priced out of this market for the time being so present little competition here, with the same able to be said of WTI, both on a landed value and margin basis.

Nevertheless, fob premia for spot MEG grades appear to be weakening even as Dubai timespreads have been slowly appreciating (the two are typically fairly closely positively correlated). Meanwhile freight bringing MEG crudes to Asia continues to be weak.

All this does not paint a particularly bullish picture of the wider state of demand, particularly in Asia and in the context of run cuts/poor Chinese buying.

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