Crude markets still creaking under the weight of margin pressure

Commentary summary: 

• North Sea still correcting lower to try to open up cracking margins
• Johan Sverdrup weakness more representative of weak demand situation with light sweets bid up by Libya
• MEG spot premia have started to weaken a little but may manage to retain relative strength to WoS with lack of arb pressure from the Atlantic
• USG cracking margins under pressure, may accelerate seasonal crude intake declines

Flat price and spreads gathered steam late last week, post-Fed cut and on geopolitics, rather than improved fundamentals. Both these tailwinds should fade all else equal.

A 50bps cut was front-loaded to play catch up from the summer and forward guidance suggests more limited cuts ahead in Q4.

Either way, don’t expect improvements to oil demand any time soon from this corner. Israel’s situation will simmer for a while, but tail-end risks to oil flows remain tail-end.

Those involved don’t want all-out conflict and even then may leave oil infrastructure untouched.

The EFS has revived over the last week, technically shutting arbs to East even further. (Sparta Live Curves)

The Brent/Dubai EFS strengthened last week to over $2/bbl, up $0.50 w-o-w.

That has served technically to price out WoS crude even further w-o-w. In reality, WTI & North Sea arbs are simply still closed, both on a landed value and margin basis, with Far East cracking margins still negative.

What did indeed start to correct was spot MEG premiums. These began to look too strong last week judging by close-to-zero cracking margins.

Upper Zakum premiums dropped $0.40/bbl on Friday. Murban and Oman premia corrected by substantially less – their margins look slightly better, but only if you count a sub-$1/bbl cracking margin as healthy.

Further downside may be ahead, though a lack of competition from e.g. WTI may allow spot MEG crude to continue to clear well and remain relatively bid up.

Upper Zakum premia fell late last week, opening up cracking margins above zero. (Sparta Global ARBS – ARBs Comparison)

With the Nov trade cycle in full swing, Chinese interest in e.g. WAF should be picking up. So far Angolan crude diffs don’t appear to be pushing higher; that may reflect generally poor arb econs.

China received another batch of product export quotas. What actual exports will be like should be dictated by their export margins, which are supposedly still pressured.

August crude runs were very low too. We remain relatively cautious on any sustained upside to Chinese buying.

The North Sea continues to correct lower on average. Brent grade’s FOB saw a $1/bbl decline on Friday, echoing an earlier move in Forties. Again, that brings cracking margins above the zero mark. Topping margins on BFOETM remain well into negative territory.

Unless we get a sizeable upward correction on clean product cracks, these margins don’t yet look conducive to a big step higher in the physical crude market.

As such we remain cautiously slightly bearish on this front with crude needing to price weaker to clear.

TD7 is also doing its bit to open up econs. We should also note bids for Forties from East Asian players mid last week which appeared to support differentials, but which are very much against arb economics according to our numbers.

(Sparta Historical Forwards)

North Sea cracking margins are holding above zero, but only due to FOB premia correcting lower. (Sparta Global ARBS – ARBs Comparison)

Particularly weak is Johan Sverdrup, which appears to be having trouble finding buyers in this low-margin turnaround season. Its FOB is now $1.50/bbl, the lowest since March.

That continues to underpin the notion that light sweets are being held up only by Libya’s export halt while the relatively stable medium crude market is for now more reflective of real demand.

Sverdrup cracking margins are relatively better than light sweets as expected, but the grade is feeling the need to price into new markets with cracking margins in e.g. Far East now approaching the zero mark and in the last weeks much improved against the Upper Zakum equivalent.

The Med might normally have been an alternative destination, but demand appears weak.

Johan Sverdrup is pricing into alternative markets such as WCI with demand closer to home lacking. (Sparta Global ARBS – ARBs Comparison)

On WTI, TD25 is continuing to try to help volumes flow to Europe, assuming they are needed. USG FOB premia have ticked up a little w-o-w on MEH/Cushing pricing up a little and the waterborne premia recovering from a brief foray into negative territory (vs MEH) last week.

The main confounding factor remains WTI Futures spreads, which are strong given these margins.

Strong spreads are of course related to Cushing stocks. Both PADD 2 and 3 crude runs are due lower seasonally and both have started to slowly decline in the weekly data. The effect should accelerate going forward and help ease Cushing tightness.

USG product prices are pricing out both domestic runs and import margins on e.g. WAF. (Sparta Global ARBS – ARBs Comparison)

USG margins are meanwhile interesting: 321 cracking margins are losing steam even relative to NWE, which is feeding through also to USG disty arb econs to Europe. This may accelerate seasonal run declines.

Typical WAF cracking margins to the USGC remain just negative and even relatively to e.g. the Med have slowly lost ground over the last 6 weeks. All told we still see TI/Brent wider next month.