Spectre of escalation roils paper markets and arb econs

Commentary summary:  

• Brent strength on geopolitics creates bigger hurdle for European crude to clear East.
• Libya’s return, end of Kashagan maintenance sees light sweet avails shoot higher.
• Refining margins have brightened but buying looks sluggish for now.
• Worst case scenarios in the Middle East more likely, though workarounds are at hand.
• Loss of Iranian crude would create substantial hole to be filled by spot medium (sour) crude into China. Aramco’s latest OSP hikes into Asia may even pre-empt this eventuality.

Paper crude markets were inevitably warped over the last few days. The geopolitical premium has boosted ICE Brent preferentially, sending the EFS out to beyond $2.50/bbl from some $1.50 at the start of the month.

The Brent/Dubai EFS has ballooned over the last few days. (Sparta Live Curves)

This means that North Sea, Med, and WAF crudes have a new hurdle to clear for now, if they are to shift excess to the likes of Asia in the November cycle.

The problem of course is that Libya’s widespread force majeure has ended and supply is now ramping back. CPC availability should also increase post-Kashagan maintenance.

Refining margins are generally slightly more favourable and the little turnarounds that are on the books are ending, but buying so far does not look to be that supportive in Europe. That may be due to refiner inertia as we have mentioned last week.

Sverdrup FOB premia continue to fall, now approaching -$2.00/bbl against Dated Brent; some flows are being reported to Asia, something we had been highlighting was a competitive trade over the last week or two.  

However, arb econs may not be relevant in the coming days. Attacks on oil infrastructure in Iran (and possible retaliation by Iran against other oil targets in the region) may spark panic buying in various markets and against arb econs.

Real disruption to MEG crude (and products) supply should in theory see Dubai structure rally, allowing Brent-linked Atlantic crudes to arb East. Freight rates are likely to spike in the event of attacks, on war premiums and trade re-routing.

For now, though, and all else equal, it looks like North Sea, Med, Black Sea, WAF grades can only stay under pressure and may even need to see their FOB premia tumbling further.

That presents a problem for WTI, since the arb is for now notionally closed to Europe and Asia. WTI on an Afra basis looks expensive for late November delivery in NWE, and even Suez econs are under pressure.

The big change has been a spike in TD25 which appeared to benefit from upside to prompt demand with vessel avails ample at the start of the month. TD25 is now backwardated.

TD25 has spiked over the last week. (Sparta Live Curves)

TD25 has spiked over the last week. (<a href=”/platform/#live-curves “>Sparta Live Curves</a>)

It looks as though USG pricing (e.g. MEH diffs and a by now fairly strong USG premium) might have some downside potential, particularly with PADD-3 runs looking fairly fragile, US crude stocks having turned a corner over the last few weeks, and light sweets amply supplied in NWE as said above.

In the East, Murban remains the light crude of choice and that seems to have helped FOB premia stabilise amid thin trade, after having weakened somewhat over October to date.

It might be this is pure margin-driven with Murban cracking margins well above water while margins on a suite of arbed light sweets from NSea/Med are still negative. The one exception appears to be CPC whose relative econs do look markedly improved (and whose margins are just about workable).

CPC econs to Far East are improving. (Sparta Global ARBS – ARBs Comparison)

Aramco released their OSPs for November load. Asian-destination barrels were hiked with Arab Light up some 90 cents.

From a margin/landed value perspective, depending on what you choose as the competitor, that still doesn’t make these barrels appear all that expensive for early Dec arrival into Far East. AL is still for example running at substantial discounts to Sverdrup.

Arab Light still looks economical against e.g. Johan Sverdrup. (Sparta Global ARBS – ARBs Comparison)

Other factors might be coming into play, particularly generally improved cracking margins vs late August lows, and of course geopolitics. Most Iranian crude arrives into Shandong and a substantial hole would need to be filled by spot medium crude if these barrels go missing.