Risks to the upside grow despite weak product markets
Last week saw flat price rebounding against the grain of underlying market sentiment, with product cracks lower once again and managed money positioning remaining decidedly bearish.
ICE Brent strength has provided support to the North Sea physical market and prompt ICE Brent timespreads have now broken the $1/bbl mark for the first time since early-April.
Whilst geopolitics remains a potential bullish factor, with the Suezmax Sounion apparently destroyed over the weekend carrying around 1 million barrels of presumably Iraqi crude onboard, we had been struggling to see a significant uptick in fundamental strength in the market to justify the return to higher outright prices.
Lower exports from Saudi Arabia and increased cuts from Iraq and Kazakhstan as part of their OPEC+ commitments may be helping, but otherwise we were once more turning to China as the most likely source of swings in the strength of the market.
However, developments over the weekend and early Monday including a flare-up in Hezbollah/Israeli tensions, renewed Iranian threats and the Libyan civil war threatening to remove substantial Libyan supply from the market imminently, the accumulation of short positions across major oil contracts looking increasingly risky despite the seasonally lengthening crude balance.
Returning to the physical market, WTI Midland waterborne FOB prices at the USGC have fallen steadily over the last two weeks, declining by over $1.20/bbl against the underlying futures contract.
With the Forties FOB price itself rising by over $1/bbl in that timeframe, the two grades have moved from landing at parity with one another to WTI landing into NWE in late-September over $2/bbl cheaper than its nearest BFOET competitor (Forties).
Of this shift, only ~25cents can be attributed to a slight widening of the underlying futures contracts, but we would be looking to WTI/Brent as part of the solution over the coming weeks.
With WTI now landing very cheaply into Europe and competitively into Asia (vs North Sea or WAF grades), we can expect USGC exports to tick higher following an August reading which has been rivalling levels from May and around year-ago levels into NWE but looks likely to end the month below seasonal levels overall (Vortexa, EIA).
PADD-3 inventories are in a comparatively healthy place to deal with an uptick in exports, sitting comfortably around seasonal average levels with crude intake only likely to remain at current levels for another few weeks before turnarounds kick in once more, but Cushing inventories have continued to trend lower and will require a strong turnaround in pricing to avoid reaching very low levels.
(Source: EIA)
We have been consistent in recent weeks in our call that the WTI/Brent spread looks too wide, and with cash diffs either side of the Atlantic now moving in the same direction, it will be very difficult to justify a WTI/Brent future spread over >$4/bbl as we move into September.
In the first instance, current high DFLs will likely need to find their way lower as more US crude lands into NWE, although support from potential further Libyan outages can support here for the time being.
As Europe also begins to enter its own turnaround season, and with arb opportunities out of the region for North Sea grades currently very shut on the back of a stubbornly high Brent/Dubai EFS and weak margins in the East, the recent strength in the physical North Sea market also looks ripe for a downturn in September.
Finally, speaking of those arbs into the East, margins into refineries in the Far East without full conversion capacity have been tumbling recently, and there is now very little incentive to pick up any barrels from the West of Suez at current levels.
Our indicator margins point to September and October posting the weakest benchmark refining margins in Asia since 2021, with planned turnarounds in the region not currently enough to breathe life into EoS product markets on their own just yet.
(Source: EIA)
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