Deferred WTI/Brent spreads need to narrow in the short-term

5 August 2024 Time to read:  minutes

Broader markets are reeling and giving the message that Fed cuts from September onwards are already too late. From an oil demand perspective in this regard, in most scenarios going forward there looks to be little support except from potentially substantially lower outright prices.  

Flat price itself is being dragged down in unison, as are physical North Sea and ICE spreads. Inevitably volatility will stay high in the coming days, with one factor being geopolitics; at the time of writing Iran had not yet launched a strike on Israel.

Oil has been up to this point cautious about the risk of supply disruption, which we think is largely correct. Israel and Iran’s back and forth in April was carefully managed and choreographed; similar may happen in the coming days. Iranian oil infrastructure is a potential target in any severe escalation, though this is highly undesirable for Israel’s allies. 

We think deferred TI/Brent spreads are too wide and need to narrow from here. A rapid decline in TD25 and re-widening in TI/Brent last week provided a needed cooling off for WTI landing NWE for late Sep.  

However, WTI in NWE for mid-Oct is at clear discounts, partly on still-wide deferred TI/Brent spreads. With Europe buying soon for the maintenance period, and with still a month left of PADD-2 & 3 seasonal inventory draws (particular with crude intake in both PADDs likely to rebound from current lows), cheap WTI cif NWE in Oct needs to correct itself.

Cushing crude stocks are already below 30 million barrels and each successive draw from here risks pricing centre spikes.  

US exports to Europe in July were already high and thus may have a substantial chance to decline m-o-m in August.  Weather disruptions may also play a role (Florida is now bracing for another hurricane).  

If WTI export avails do not in fact weaken, there also seems to be a rising risk of more US crude being dumped into Europe as the market of last resort, with signals suggesting the Asian market continues to soften.

This could mean pressure on physical Brent and ultimately also see TI/Brent trying to narrow & CFDs weakening to cut off the prompt WTI flow.

The main culprit here is Murban, whose spot premia continue to slacken off and cement it as the go-to light benchmark in Asia over e.g. WTI. Murban’s direction suggests softening Asian buying general heading into TA season. 

CPC, whose FOB premia also continue to tumble, is another red flag, and while there should be some natural weakening as availabilities rise post- Tengiz maintenance, reports suggest poor demand as a further factor.  

On the heavier side of the crude spectrum there as similar signals. Guyana crude FOBs have dropped off substantially over the last few days, amid difficult to work econs in NWE against the likes of Johan Sverdrup. A similar thought process may have been behind massive cuts to September loading Aramco crudes to NWE and the Med over the weekend.

This should help shore up margins on baseload term crude into Europe, potentially helping support utilisation at plants not heading into maintenance.

Arab Light’s OSP to Asia-pacific on the other hand was even boosted by a small 20 cents/bbl; there the rationale might be to display confidence in demand its core demand base region, but from the perspective of competing medium sour barrels out of the MEG there also has not been nearly so much competitive pressure as in NWE.  

Crude Book a Demo

 

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