Physical market remains bogged down, but green shoots of margin optimism emerge

Somewhat inevitably post-OPEC meeting crash, ICE Brent rebounded last week, with spreads also recouping some losses.

There were only a few signs of recovery in the physical market to accompany this, with the glut in light sweet proving hard to shift and talk in the market suggesting European refiners may prefer to run down stocks (instead of cutting runs substantially, per se).

However, if run cuts and margins are the key focus for what happens next, our tracking points to some green shoots of optimism, in addition to pure seasonality-driven buying. The bottom may now (finally) be in for the Atlantic.   

DFLs have bottomed out and recouped some losses. (Sparta Live Curves)

Firstly, CFD structure has bottomed out and started to gain ground from weak levels. There are also reports of firmer demand from European players for heavier North Sea grades, with Johan Sverdrup’s premium to Dated now up $1/bbl month-to-date, meaning the grade is now landing relatively expensively in the Far East.

Black Sea light sweets have been bid up, with Azeri/BTC up some 60 cents w-o-w vs Dated. Asian demand is reportedly picking up for these grades, given several weeks of open arbs.  

There is a lot of focus on margin levels and their impact on runs. Our tracking of simple light sweet margins in various locations shows substantial improvements compared to much of Q2. All of BFOET simple light sweet margins in NWE are in the money (though WTI is not).

Far East simple light sweet margins are still just negative, but a vast improvement vs April, particularly those crudes sourced WoS. 

All of BFOET simple margins are currently in the money. (Sparta Global ARBs – Dasgboard)

Particularly WoS sourced simple margins on light sweets are vastly improved if still technically not in the money. (Sparta Global ARBs – Dashboard)

If we make the assumption that this is representative of the economics for the marginal barrel of refined crude, then from this perspective the situation is improving. What’s more, Aramco’s reduction in Asian OSPs (while raising in Europe) are a nod to the need to improve baseload complex margins for term crude in Asia. 

For now there is limited movement in North Sea or WAF premia, with the latter even ticking slightly lower w-o-w. That means arbs East remain open for now, with the EFS still substantially weaker than for most of Q2. 

Forties is landing in the Far East slightly discounted to the likes of both Murban and WTI for late August landing. Potentially on that basis, Forties was offered in NWE late last week at slightly stronger quotes to its latest Argus print, but these were failing to find buyers, tying in with reports of de-facto floating storage here. 

Forties is still pricing very effectively into the Far East. (Sparta Global ARBs – Dashboard)

While it has been a frequent part of the outlook over the last month or two (and which struggled to materialise), physical crude should soon start to feel the effects of higher buying for Q3 runs, with seasonality still a source of strength ahead.

Yes, there may have been announcements of limited cutbacks of utilisation at plants in parts of Asia, but there is still substantial capacity to return from offline this month (similar to Europe), so the base case should still be that crude demand will be higher going forward.  

What is more, Chinese buying has been low for some time, which itself has been one of the major headwinds for the seaborne crude market. Q3 typically brings a seasonal peak in Chinese runs and buying should start to reflect this even if levels remain down y-o-y.  

Over in the US, runs remain very high in the weekly data, with the stars evidently aligning outage-wise to make this happen. For now this is not yet clearing an overhang of crude stocks in PADD-3. However MEH premia are still relatively healthy and with TI/Brent a little narrower this week, WTI continues to land relatively expensively in both Asia and NWE at the prompt.

In the Far East, spot Basrah medium can be landed at essentially the same price as WTI on a VLCC for late August, helped also by lower TD3c rates and despite a drop in VLCC rates brining TI to Asia. Basrah discounts might even widen if SOMO follows Aramco in shifting down Asian OSPs for July loaders.  

TD3c rates are declining. (Sparta Live Curves) 

WTI is landing higher than spot Basrah Medium in late August. (Sparta Global ARBs – Dashboard)

As such, we maintain the view that TI/Brent needs to widen out a little here. This is needed to price WTI better into the global system, and to overcome still relatively healthy TD25 rates that are landing TI expensively into the North Sea. 

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