Refinery margins & OPEC+ cancel out Libyan bull signal

Flat price took a hit late last week on indications OPEC+ would indeed bring crude supply back as planned through Q4. The option to pause these supply hikes stays open – which should remain in our minds going forward – and the decision will likely be price-driven. We should also recognise that the cumulative volumes returned will initially be relatively small.  

However, messaging is important. We might assume this was done to firstly hold back flat price from overshooting at a time of frail economic signals, given the situation in Libya has some potential to drag on.

Longer term arguments for letting flat price drop to stimulate demand and even soften non-OPEC supply growth are also somewhat valid.  

The big issue in the immediate term is the state of margins just as refiners turn into the maintenance season, which should pressure crude structure over the next week. Even North Sea crudes in NWE are showing margins essentially underwater, even for medium complexities.  

WTI Afra margins in NWE for medium setups are essentially zero. (Sparta Global ARBS – Dashboard)

DFLs had cooled slightly at the time of writing amid NWE margins pressure. (Sparta Live Curves)

DFLs do indeed look to have eased off today, with Brent-linked therefore grades attempting to open up margin econs once again, but more pressure is likely in the short term.

Another issue for the North Sea is WTI which is still landing relatively cheaply in NWE with the WTI/Brent spread still wide and TD25 taking a turn lower recently.

At the same time our WTI medium margin (Afra basis) is practically $0/bbl, which could spur some pullback in a by now relatively strong WTI USGC waterborne FOB (vs Cushing). 

Murban medium margins are positive in the Med and above WTI and light sweet Black Sea grades. (Sparta Global ARBS – Dashboard) 

While we were sceptical of run cuts up to this point, margins at these levels should now trim global runs (official maintenance stats may also begin to rise).

The physical impact of a lack of Libyan exports should thus be muted for now; CPC, Saharan Blend, and other Black Sea and Med crudes were bid up over the last week or so, but the upside is likely to be capped from here by poor crude demand. CPC’s gains also make e.g. WTI more competitive for Med buyers here. 

Over in Asia, there are similar problems and Murban margins are flirting in and out of negative territory even in a medium complexity. This might be something of a milestone and could see the Asian physical market begin to weaken from here for the next week with Murban premia likely to come under pressure.  

Murban medium margins in Far East have rapidly closed in on the $0/bbl mark. (Sparta Global ARBS – Dashboard)

All this is suggestive that physical crude markets need to soften further to try to clear in a competitive margin environment.

However, we do also think particularly distillate cracks should stabilise and potentially claw back some ground over the next month or two, mostly on seasonality (e.g. supply squeezed on turnarounds and the beginnings of buying for stronger winter demand months).