Physical Brent still primed to the downside, with time running out also for a bump in Q3 seasonal buying

Flat price eased off over the last few days amid broader risk-off sentiment, particularly on geopolitical front. ICE Brent spreads topped out some days ago already and has been range-bound for the week.

ICE Brent spreads are rangebound. (Sparta Live Curves)

Hurricane Beryl has made landfall on the USGC, shuttering or reducing port and refinery operations in the Houston area.

Trading was thin in the run-up to the weekend on the back of 4^th July celebrations. While there may be short pauses in crude import/export operations as a result, the risk appears rather that there will be more substantial – if still ultimately limited  – impacts on refinery operations and therefore crude oil availability through H1 July.

That also risks reversing what was a very sizeable draw in weekly crude stocks, as shown by EIA data last week.

WTI is still landing cheaply in NWE. (Sparta Global ARBS – ARBs Comparison)

On the export economics side, there have been few substantial changes in signals over the last few days.

WTI is still landing relatively cheaply into NWE, largely on the strength in the Dated Brent market itself and in spite of a gradual narrowing of the WTI/Brent futures spread through late June and early July.

Murban is still pricing out WTI and Brent-linked crude in Asia. (Sparta Global ARBS – ARBs Comparison)

European demand for light sweets is still being pegged relatively lacklustre for the time being, and may be impacted once again by port worker strikes in France.

With WTI and Brent-linked crudes still priced out of Asia for the time being relative to benchmark Murban, we maintain the view that physical Brent looks ripe for further downside over the coming weeks, likely putting pressure on ICE spreads & TI/Brent as a result.

Most NWE simple margins are negative still and have been worsening vs early June highs. (Sparta Global ARBS – ARBs Comparison)

On the margin front there is little support for the time being. NWE simple margins are in the red for most grades, and if we take these as representative of the marginal barrel of throughput, then we must assume clean cracks need to climb a little higher before crude demand can meaningfully strengthen further from here.

Complex margins on medium and heavy crudes have improved a little over the last two weeks, however on light sweets there has been, if anything, a deterioration.

Source: Sparta ARBs Dashboard. Term AG crude margins in Asia are rising, partly on OSP cuts. (Sparta Global ARBS – ARBs Comparison)

In Asia there is a similar situation emerging, with the difference being that while Atlantic-sourced crude margins in the Far East have been declining, largely on higher landed costs, medium/heavy AG-loading margins are on the rise.

Term crude econs – for example Aramco grades – are showing much-improved margins, partly also on another round of OSP cuts to Asian destinations.

That may shore up demand for term barrels, but speaks for still limited impetus to hike buying beyond what simple seasonality (ending of maintenance) would suggest.

Even simple margins for Murban, currently the cheapest key light grade into Asia, are in the red for now.

TD3c rates continue to drop. (Sparta Live Curves)

All told this still paints a picture of a relatively weak global physical crude market, together with lacklustre freight markets.

We re-iterate the call that physical Brent will need to correct lower to price back into Asia unless the more local demand situation improves.

What is more, time may be running out for a seasonal bump: global crude buying is currently focused on mid to late Q3; in a few weeks’ time we will be moving into a buying period that reflects the turnaround season in both the West and the East, which all else equal should see renewed pressure on the physical market.  

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