Market rebound belies mixed signals in physical crude

Last week saw broader markets rebound with crude time-spreads also dragged higher. CFDs were driven higher particularly at the prompt.

Some opportunistic buying of North Sea post-flat price/structure collapse in the week prior might have been at play. Force majeure on Sharara exports also helped temporarily though it appears Libyan outages will be limited.

The re-strengthening of physical Brent appeared to snuff out very quickly what was developing competitiveness from the likes of CPC into Asia (see chart).

Continuously weak Murban premia create headwinds for Atlantic Basin crude arbs and suggest generally poor demand in Asia still.

CP was briefly competitive into the Far East against Murban. (Sparta Global ARBS – ARBs Comparison)

Indeed most arb opportunities from the Atlantic Basin to Asia are still unworkable, meaning we remain relatively bearish physical Brent for the coming weeks, absent geopolitical upsets to flat price (which admittedly remain likely).

Buying over the maintenance season in Europe and Asia is underway and this should also keep a lid on the physical crude market for the time being.

We should take note of the weakening in a variety of other premia last week just as North Sea was pricing higher.

That includes Nigerian FOB premia, and particularly Guyana premia.

For WAF, a notable issue over the last few months has been the stark reduction in flows to destinations such as Indonesia with more competitive crude available closer to home (e.g. Middle East).

This is one consequence of relatively stubborn WAF FOBs themselves, as well as the EFS.

Even in NWE, our Bonny and Forcados complex margins are trailing competitors by several $/bbl.

WAF premia still have room to move lower going forward, putting more pressure on the Brent complex.

(Sparta Global ARBS – ARBs Comparison)

Meanwhile for Guyanan grades, a rapid decline in FOB premia last week, combined with relatively cheap freight has served to put Liza complex margins in NWE at a premium to the likes of JS.

Liza has now started to landed at discounts to JS (with complex margins higher). (Sparta Global ARBS – ARBs Comparison)

Nymex WTI spreads rebounded more strongly than ICE Brent last week, despite a mild build at Cushing, rather reflecting yet another strong draw on overall commercial stocks.

As we said last week there is likely still a month of US draws to go, particularly with runs appearing to recover for now (and with further upside to come once the likes of Joliet restarts).

What is more, increasing volumes of Canadian crude exiting the system via Vancouver should draw at least some additional WTI volumes out of Cushing (as TMX exports ramps up further), with USG refiners looking at the same time for alternative medium/heavy supplies on the international market.  

The pull on WTI out of Cushing may be significant but huge, but competition for heavy crude will presumably heat up a little with Dos Bocas supposedly running at 50% already and with plans to ramp up from here to end-year.

At the moment, heavy LatAm & Basrah arbs into the USGC look more attractive than most (non-LatAm) competitors such as JS and heavier WAF.

LatAm FOB premia have actually been slackening fairly drastically recently, part of a broader global weakening in medium-heavy premia that does not suggest urgent shortages of such crude.

(Sparta Global ARBS – ARBs Comparison)

Prompt TI/Brent spreads continued to strengthen last week and we expect deferred TI/Brent spreads to narrow, partly on more limited WTI export avails and pressure on the Brent complex.

Our forward TD25 assessments are much stronger than prompt currently, and given ample vessel supply, we assume that pressure on Sep & Oct TD25 starts to materialise given the above, feeding into narrow deferred TI/Brent as well.   

TD25 is currently strongly contangoed. (Sparta Live Curves)