Physical crude looks set to soften further

ICE Brent held steady in the low $70s late last week and early trade this morning. Front spreads are hovering at some +$0.50/b while the DFL gained a little ground through the week.

Brent spreads retained backwardation but relative. (Sparta Live Curves)

Questions over what seems to be supporting this relative strength, amid all the wider bearishness on demand (and margins), seem to be easy to answer. Evidently the WoS is still missing Libyan light sweets.

A few more weeks of partial export halts seem likely. Some US GoM volumes remain offline post-Francine but presumably outages are short-lived.

What’s going more under the radar is relative strength in WTI timespreads, which is presumably partly passing through to Brent. Cushing stocks are very low.

However, the prospect of seasonal crude builds ahead of us, very weak margins crimping demand (both foreign and domestic), and some nuance about what exactly has been drawing recently (heavy vs light barrels) make WTI structure ripe for a relative correction post-September.

There are chances of spikes before then, but generally global crude structure should feel pressure from WTI soon.

MEH premiums are already starting to decline which may signal that the more amply-stocked PADD-3 can afford to draw fewer barrels, while Whiting’s maintenance will also help ease PADD-2 draws.

In the physical market, while TI/Brent has narrowed a little as a result of Cushing, WTI appears still able to fill gaps created by Libya in Europe, and will presumably be able to somewhat refill domestic stocks, with the solver being weak flows to Asia.

We have WTI landing still competitively to Forties in NWE and almost $2 cheaper than Saharan Blend in the Med at the moment, landing late Oct.

Black Sea/Med FOB premia likely still represent alternative buying for prompter delivery/processing in the absence of Libya, but the pressure beyond the prompt seems evident. TD25 looks to be under pressure and is aiding WTI’s competitiveness.

Elsewhere, the recent WAF overhang supposedly cleared fast over the last few weeks, but the upside to Nigerian premia was very short-lived and are now substantially lower m-o-m and y-o-y.

Qua Iboe and Forties medium margins have moved closer to zero following deeply negative values in August. (Sparta Global ARBS – ARBs Comparison)

WAF and North Sea are attempting to compete better with WTI landed values. (Sparta Global ARBS – ARBs Comparison)

Both Qua Iboe and North Sea’s Forties looked to have been pressured to soften, and partly as a result both have opened back up their medium margin in NWE to around zero, from deeply negative levels in late August.

These aren’t distressed cargoes but there is a definite trend towards clearing into refining setups despite all the outages to supply going on in the broader region, as well as towards competing with WTI.

Murban medium margins in Asia are barely workable, some spot MEG grades are not. (Sparta Global ARBS – ARBs Comparison)

In Asia, the trading cycle for Nov barrels will soon be underway. MEG spot barrels look liable to trade lower, with cracking/medium setup margins on most key grades looking poor on average.

WTI’s competitiveness seems lacking looking at flows, and this seems to be explained by several weeks of high landed values relative to Murban as well as now firmly negative cracking margins. Asia doesn’t need the arbed volume at this point in time.  

Medium and heavy sweets in Asia appear likely to come under some pressure going forward given the large correction in VLSFO cracks. Light sweets may have been supported at the margin by VLSFO  strength too, though to a lesser extent.

VLSFO strength may have had a marginal impact on lighter sweet barrels in Asia as well as heavy barrels, but is now correcting. (Sparta Live Curves)