North Sea weakens further, arbs East opening further, but poor demand prevails

21 May 2024 Time to read:  minutes

While flat price stabilised w-o-w, ICE Brent structure (M1/3) has come under particular pressure, losing another 25 cent w-o-w, while WTI and Dubai are largely unchanged.

That has continued to help narrow the TI/Brent spread and has pushed the EFS down further.

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The Brent/Dubai EFS continues to weaken, helping open up arbs East on paper. (Sparta Live Curves)

Hefty pressure on the North Sea/CFDs has only served to emphasise the picture painted here last week; arbs East are increasingly open, but it appears that demand is simply unable to support a rally for the time being.

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North Sea physical pricing continues to weaken. (Sparta Live Curves)

By now a variety of light sweet Atlantic Basin crudes are landing at discounts to Murban in late July. This includes WTI which is at its first firm discount since the launch of our crude offering, but also Forties, and some light sweet WAF grades.

CPC Blend – even round the Cape – looks wide open to Asia, with FOB assessments under substantial pressure over the last week on ample avails. 

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Atlantic Basin crudes are landing in Far East at substantial discounts to e.g. Murban. (Sparta Global ARBS – ARBs Comparison)

From the perspective of spot MEG grades – premia to Dubai swaps are barely budging, Dubai structure itself is relatively supported, and freight rates East are largely flat.

You could probably argue that this is simply supply-led “tightness” but may also reflect base demand for heavier crudes while marginal demand for lighter grades is currently poor.

In the same vein, that preferential demand appears to be behind the relatively more buoyant FOB development for the likes of Johan Sverdrup in the North Sea amid reports of still reasonable interest for the grade in Asia.

JS is still, however, comparatively cheap against competitors into NWE.

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Johan Sverdrup is still largely cheaper than competitors in NWE, with Basrah Medium a notable exception. (Sparta Global ARBS – ARBs Comparison)

What somewhat goes against this picture is the slackening of Basrah Medium spot premia to both Asian and European destinations over the last few days, following OSP hikes earlier in the month.

At least from the perspective of relative arbs, this was not all that “necessary” looking at landed values versus competitors for similar quality, at least in NWE.

In the Far East you could make the argument that spot Basrah did need to weaken, with JS and similar grades in the Atlantic Basin increasingly competitive.

If we assume Far East econs are more impactful here, that could suggest that more pressure can be expected on the wider suit of spot MEG crudes over the coming days.

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Basrah medium spot premia came under pressure partly on the back of Atlantic Basin crudes competition hard in Far East. (Sparta Global ARBS – ARBs Comparison)

What’s behind the overall poor demand picture? We would still suggest the primary impact is maintenance; alongside an outsized impact on pricing/buying from weaker runs in China that are themselves chalked up largely to turnarounds.

We should still see some level of increased buying for summer runs with end-user demand on the up seasonally, even if the effect is somewhat more muted than otherwise anticipated. 

Certainly from the perspective of the US, there is little evidence of run cuts yet (though watch out for relatively elevated product stocks), with PADD-3 runs relatively strong and PADD-2 runs also moving higher.

The latter is helping put a cap on Cushing stocks for now, while PADD-3 stocks are proving hard to clear from a high level, which is allowing continuous pressure on MEH diffs and ultimately providing room for TI/Brent spreads to narrow. A flat to lower TD25 is also contributing.

Part of the high PADD-3 stock picture is coming from its crude imports, which have moved substantially higher over the last month and are up notably y-o-y despite a slightly lower level of runs.

Perhaps the combination of expectations for lower Mexican exports going forward, the startup of the TMX expansion squeezing the flow of heavy Canadian crude to the USGC, and stronger PADD-2 runs are contributing.

US domestic heavy crude assessments have been strengthening broadly over the last week, which could help support the call for international imports into the US over the next weeks.

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PADD-3 crude stocks are proving hard to budge from relatively higher levels. (Source: Sparta based on EIA)

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