June’s Brent rally has seen the complex price out of Asia, WTI price firmly into Europe

June’s crude rally continued to steadily gain momentum last week and pricing remains bullish in the North Sea physical market.

Broader oil markets themselves are garnering support from evidence of stronger (seasonal) end-user demand in the US, a step up in geopolitical risk (Red Sea, Israel), a turnaround in managed money positioning from very short levels, and expectations of Q3 balance tightness.  

The DFL continued to rally last week. (Sparta Live Curves)

From the physical crude perspective, the tightening appears to be largely focussed on the North Sea alone, which has meant a substantial deterioration in arbs out of the region, as well as allowing WTI to price into Europe more convincingly.  

On that basis, we would argue European buying now needs to prove strong and sustained in order to keep North Sea strength intact, or else BFOET needs to cool a little.   

The NWE/Med is being discussed as relatively tight for the time being, even in the light sweet market. Evidence for that is widespread, be it CFDs, North Sea fob premia, CPC diffs (at multi-month highs). From the arb perspective, alongside an EFS that has risen to some $1.50+, econs are now at their weakest point since late April.  

For the key comparisons of Murban, WTI, and Forties in the Far East, Murban is by now far the cheapest for late August landing, while WTI has opened up a substantial discount to Forties, though reports suggest Asian demand for WTI itself remains tepid.

CPC diffs have been strengthened by improved interest out of North Asia, but this may also now start to drop-off given the pricing setup.  

Murban is landing far cheaper than WTI or Forties. (Sparta Global ARBS – ARBs Comparison)

In Europe you can make the argument that the rally in BFOET is now overdone with the view that WTI is landing very cheaply against these barrels, as well as the fact that the likes of Johan Sverdrup is now landing cheaper than Forties into NWE.

For NWE refiners, there are now plenty of substantially cheaper medium-heavy barrels to pick up for July and August delivery, including Mars, Tupi, spot Basrah Medium.  

Johan Sverdrup is landing cheaper than Forties in NWE. (Sparta Global ARBS – ARBs Comparison)

Even in the US, the rally in Forties has pushed it down the pecking order against some WAF barrels.

In our USGC destination for example, Bonny light has shifted to a relatively rare discount for Forties & Sverdrup (essentially the first time we have tracked this) for early August.  

Bonny Light is landing at a discount to Forties and JS in the USGC. (Sparta Global ARBS – ARBs Comparison)

Over in the US sphere, the picture has been one of gradually cooling MEH premia to Cushing, as well as FOB waterborne diffs firmly in contango with July loaders pressured and August premia stronger.

This reflects pressure to reduce PADD-3 stocks via exports in an environment where runs have already started to cool after a purple patch in May.

EIA weekly data show US crude exports continue to look a little tepid, however, having now dipped to 4 mb/d on a four week average from 4.5 mb/d in early May.

Marginal demand for WTI from all regions over the last month appears weak still, with TD25 now beginning to ease as well.   

Hou-Rott Afra (TD25) rates are cooling. (Sparta Live Curves)

In the rest of the broader crude market it is also difficult to come up with evidence for a substantial uptick in broader refining demand.

Heavy LatAm fob premia are weaker month to date despite reports of various outages (most recently force majeure on Napo due to weather-related pipeline issues, but also lower Brazilian production). 

In the Middle East, freight rates to bring MEG grades to Asia remain tepid and have actually started to drop substantially over the last week.

Spot fob premia are also down month to date. Again, Q3 global runs are expected higher and should support a tighter crude market; but evidence suggests Brent might have gotten ahead of itself in the very short term and with Chinese crude buying still seemingly tepid.   

Source: Sparta Live Curves. TD3c rates (MEG to Far East) are cooling. (Sparta Live Curves)

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