Physical crude holds up against flat price freefall, for now

ICE Brent ended the week just short of the $60s, while intermonth spreads are substantially weaker but still notably in backwardation.

For now, the physical market is not signalling any urgent need to store barrels and certainly has not capitulated in the same way as flat price.

With it appearing to be clear that marginal demand for crude is poor (weak margins, turnarounds), one may even come to the assumption that crude structure is being supported for now only by supply (disruptions, OPEC Aug output etc.). Either that or the effect of poor margins still needs to filter through.

ICE Brent remains backwardated. (Sparta Live Curves)

With flat price in free fall, there are some new signals to take note of in arb econs.

The first is that Dubai structure has not weakened quite as much as WTI and Brent over the last week, with the EFS is now trading in the $1.50 range from nearly $3.00 at the end of August.

That has led WTI (VLCC) to land in the Far East for end-Nov delivery at far more competitive prices vs Murban than has been seen for some time.

Note also Murban (and other spot AG crude) FOB premia for the time being remain strong for now but may start to come under pressure from the above.

WTI is landing more competitively in Far East. (Sparta Global ARBS – ARBs Comparison)

Complex margins for both WTI and Murban in Asia are positive, but medium margins are essentially zero.

That probably means the arb is still closed for WTI now but may re-open fairly easily with some rebound in product cracks/margins around the global turnaround season and with US seasonal stockbuilds around the corner.

TD22 has been easing recently but may yet come under pressure short term to open up this arb to Asia.

Medium WTI margins remains under water in Asia. (Sparta Global ARBS – ARBs Dashboard)

With flat prices substantially lower m-o-m, this is usually a time to consider that Chinese players may up import volumes (with landed values often seen as a catalyst).

Of note in this context is China’s increased appetite in recent days for (heavier) Americas crude, including Tupi and in particularly Mars and Southern Green Canyon, and even ANS. Mars premia were driven higher last week.

Of note in China recently is the startup of the 400 KBD Yulong petrochemical focussed refinery in Shandong. The setup recently purchased Oman and ESPO for November processing. This may also provide a temporary boost to Chinese imports, though both short term and long term prospects will of course be dictated by the level of crude import and product export quotas from the government itself.

There we have doubts that strong import increases will be maintained through e.g. H1 25, given the challenges of poor domestic demand, weak export margins, internal drive to rationalise the sector etc.

Forties simple margins in NWE have improved, helped by sell-off in CFDs/DFLs. (Sparta Global ARBS – ARBs Dashboard)

Meanwhile in Europe, DFLs sold off with flat price as expected.

This has not yet made a substantial dent in landed values ex-Europe for North Sea grades vs competitors, but it has helped to shore up simple margins since late August.

Our Forties simple margin in NWE is now back to the kind of (negative) level seen through much of the last few months.  

The WTI arb into NWE remains well open. (Sparta Global ARBS – ARBs Dashboard)

That probably doesn’t spell an end to pressure in NWE though. The refiner arb for WTI into Europe remains wide open, with WTI still landing at substantial discounts to BFOET for late Oct delivery, as well as most Med/Black Sea grades.

North Sea as a result looks set to see further weakness, particularly with a quick solution to export flows out of Libya looking ever more likely.