North Sea competitiveness improves abroad and into refineries, but Libya return spells trouble

Commentary summary:  

• Light sweet North Sea refining econs are markedly improved, but needs to be sustained over October also on the product side of the equation.
  
  
• Johan Sverdrup looks very competitive in the Far East and reasonably so in the Med vs spot MEG crude.
  
  
• Murban weakening and Libya return suggests European light sweets would have to weaken further to clear Eastward in Oct.

Flat price has been further roiled by events last week, amid Libya’s likely return to full exporting in October, and escalation in the Middle East.

The reaction to press releases concerning Saudi Arabia and price targets was reasonably strong.

It tells you if nothing else that the market was anyway struggling to see how OPEC+ will continue to manage balances next year, which is partly feeding into prevailing bearish sentiment.

Nov/Dec ICE Brent weakening into expiry. (Sparta Live Curves)

ICE Brent nosedived once again this morning, with Nov/Dec ICE Brent spreads flirting with contango at just +$0.15/bbl ahead of expiry. Dec/Jan is at some $0.25/bbl. On the physical side, we see a similar situation to the last couple of weeks.

The North Sea continues to weaken; that is happening to try to clear into refining in general (i.e. supporting margins), as well as to find arb outlets.

Ekofisk is one example (but one could also take Forties). It has gained ground in terms of competitiveness vs light sweets available in the Med and Black Sea (ex-CPC which is supported by field maintenance). That is despite Azeri and BTC diffs having reacted fairly strongly downwards to the Libya news.

North Sea light sweets are looking more competitive in the Med. (Sparta Global ARBS – ARBs Comparison)

A similar trend can be seen for Johan Sverdrup which has caught up with spot Basrah Medium (round the Cape) for mid-November landing in the Med.

In the Far East, JS is now landing cheaper than both Oman and UZ for late November landing and remains fairly competitive for Dec.

Johan Sverdrup is attempting to compete with spot Basrah Medium in the Med. (Sparta Global ARBS – ARBs Comparison)

This all sounds rosy for the Brent complex, however the spanner in the works is (light sweet) Libya barrels which appear to be returning in full in October, judging by latest press releases.

It may prove difficult to absorb these volumes, which means light sweets would need to clear into Asia.

You would think that substantial y-o-y weakness in US flows to Far East recently (largely on WTI strength) would help boost Murban and price in NSea barrels.

However, Murban also continues to slowly weaken with FOB premia down about $0.50/bbl over the last 2 weeks.

That spells further weakness for European barrels if they are to clear effectively and without strong margin signals to spur domestic demand.

Johan Sverdrup looks competitive vs spot MEG medium sours into Far Eas. (Sparta Global ARBS – ARBs Comparison)

On the margin front, we should acknowledge that cracking light sweets has become noticeably more profitable over the last 2 weeks.

Let’s see if this a) will tempt refiners back to upping buying having just announced run cuts, or b) can be sustained by the product markets over October.

Evidently sustained higher margins may see refiners squeeze in extra barrels over time, but refiner inertia is high. Hydro-skimming econs are also looking better, not least because naphtha and fuel oil cracks are asking for slightly more supply.

For now we tend to fall still on the side of caution regarding a bullish take on crude from this, with seemingly plentiful supply around the corner to absorb first.

Cracking and hydro-skimming margins are improved vs August levels. (Sparta Global ARBS – ARBs Comparison)

Over in the US, Cushing stocks were not drawn any further last week, but rather at the expense of a very large draw in PADD-3.

If we assume WTI remains rather priced out of Asia but flows well to Europe (for now), the solver would be lower runs but likely also higher PADD-3 imports (typically heavier barrels), which themselves had been trending surprisingly lower over the last few weeks.

TI/Brent cannot be allowed to widen too much either for now. PADD-2 ex-Cushing stocks also saw a big build last week, which will presumably continue with Whiting in maintenance.