Physical crude continues to slowly recover, but already putting the brakes on Eastern arb econs

Flat price tacked on $1/bbl last week and with it came a steady uptrend in time-spreads.

The early signs of a recovery in physical crude remain in place and while it is encouraging, the upswing remains limited in scope. Heavier North Sea grades evidently remain in demand, but FOB premia on North Sea light sweets remain weak.  

The prompt DFL is going from strength to strength. (Sparta Live Curves)

Export econs out of the North Sea are beginning to gradually degrade on the back of a stronger physical Brent curve and with the EFS allowed to gain $0.50/bbl w-o-w, pushing past $1/bbl outright on Thursday before cooling again on Friday.  

The EFS must surely be capped for the time being by marginal econs for the Atlantic Basin which are already under more pressure as a result.

Indeed the relative competitiveness of Murban we mentioned last week has only been cemented by recent price action, with the light crude grade landing in the Far East with a healthy 50 cent discount to WTI in late August. Murban looks even cheaper on a margin basis.  

The EFS bottomed out in early June and last week topped $1/bbl. (Sparta Live Curves)

The upshot is that seemingly ample light sweet avails in Asia itself mean that at least some of the heavy lifting on the Atlantic physical crude market needs to be done by domestic refiners themselves.  

We alluded last week to the pure seasonality-based argument for higher crude buying ahead. In this regard there are still positive signs – simple sweet margins in most of our pricing centres remain reasonably healthy.

Even for complex margins, particularly in Europe and Asia there may be a bit more confidence taken from a healthy recovery in distillate cracks w-o-w (tampered somewhat by another w-o-w loss on the gasoline side).

Murban has cemented itself as the cheapest major light grade in Asia. (Sparta Global ARBS – Dashboard)

On the US side, a massive crude stockbuild in PADD-3 up to rather atypical levels last week must surely begin to put some pressure on MEH premia in the short term, to keep WTI export econs competitive in both Asia and NWE.

WTI landed values remain somewhat expensive relative to key benchmark grades, e.g. Murban in Asia, Forties in NWE. WTI on a Suez is landing at a 50 cent premium to Ekofisk in late July.  

Eko is landing at a 50 cent discount to WTI on a Suez. (Sparta Global ARBS – Dashboard)

The first June DOE data saw Cushing stocks again drawing (and PADD-2 ex-Cushing drawing even further from already low levels), which probably slowed the pace of the widening in WTI/Brent futures last week.

The stock situation in Cushing could still turn around and aid a further widening in TI/Brent, given the likelihood that PADD-3 runs should cool (low outages have helped high run rates recently but unexpected outages and relatively ample PADD-3 clean product stocks may soon pare back utilisation).   

Simple sweet margins in most of our refining destinations remain reasonable and better than in early Q2. (Sparta Global ARBS – Dashboard)

Sparta based on EIA. PADD-3 crude stocks continue to rise and may pressure MEH.

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