North Sea to remain strong for a few more weeks and Q4 headwinds weakening slightly

A week of comparative calm in macro indicators and geopolitics saw ICE Brent dip back below $80/bbl as spreads cooled, but another tick lower in Cushing stocks and no immediate easing in the expected balance of crude making its way to the storage hub continue to raise some risk to the upside for the WTI contract.

Despite inching a tad wider again over the last week all the way down the curve, this was largely driven by an uptick in TD25 down the curve rather than any underlying softening of WTI.

Prompt TD25 has fallen recently, but looks primed to rebound at least somewhat in the short term. 

Sparta Live Curves showing WTI/Brent Future spreads against TD25. (Sparta Live Curves)

EIA Cushing Crude Inventories. (Source EIA)

Indeed, from an export basis, WTI remains in a very favourable position, landing cheaper than its competitors out of the North Sea or WAF into both Europe and Asia.

PADD-3 crude inventories ticked higher in the latest data despite returning crude runs, and at current prices we would expect to see exports to tick up again in the short term and help to underline strength in the US crude market for the time being.  

Sparta Arbs Dashboard showing comparatively landed values across a number of grades across regions. (Sparta Global ARBS – Dashboard)

Rising WTI landed prices into NWE since the start of the month have been a fundamental part of the support for the Brent complex in recent weeks, with the DFL rebounding strongly and sitting back at historic seasonal highs thanks to improved FOB prices discussed for Forties on the back of higher WTI costs.

The overall strength in the crude market has been given something of a fundamentals boost from continued Libyan outages, and reported flows into the MED have been supportive, but as we head into maintenance season it would be misplaced to declare any sustained strength yet apparently coming from the physical market.

Indeed, the support for the North Sea from additional MED buying appears unlikely to be maintained, with WTI and even WAF barrels now landing cheaper into the MED for 2H September arrivals.  

Sparta Custom Charts showing historical levels of the September DFL contract. (Sparta Live Curves)

Sparta Arbs Dashboard showing landed values for Light Sweet crudes into the MED. (Sparta Global ARBS – Dashboard)

Much has been made recently of weak refining margins and rumours of run cuts or bringing forward maintenance in Asia in particular.

A look at some relatively basic indicative margins tells us that we are indeed in a comparatively weaker moment as compared to much of this year and the highs of last summer and the entirety of 2022, but at least for our simple European and Singapore margins, we remain above the levels seen in Q4-2023.

Crucially, at least for now, forward curves remain at levels roughly equal to spot levels in Singapore, with our European simple margins looking weaker through the winter.

This contrasts with the “Complex” indicators in those regions, which are looking at their weakest levels in over 12 months currently and clean product forward curves are keeping those comparatively subdued through the winter ahead.  

Sparta Excel Plugin showing indicative refining margins vs their historical levels.

Finally, reports that margins for Chinese refiners have been improving are encouraging words for an otherwise beleaguered crude market, but an improving picture for Chinese export-oriented refiners will be largely dependent on lower runs at their competitors across the region, so we would remain cautious just now on expecting too much of an overall uptick in Far East crude buying at current forward product crack levels.