Each week should see physical oil markets start to price more medium-term disruption

Commentary summary:

• We’ve yet to see wide swathes of the physical crude market rip higher. Slightly lower ex-AG freight is getting landed costs down a little in Asia, but more is needed to help get West-East barrels flowing.

• As things stand, the fate of Fujairah port operations looks very uncertain. Any hint that Yanbu will experience similar difficulties would be very bullish.

• No clear nuanced trades today, other than that each week should see the market get more desperate.

• However, WTI does now look rather cheap globally vs the working competitors.

By now it will be clear to most the huge challenges and uncertainties going forward. Yanbu, Fujairah, SPR all garnered much attention last week. Oil port operations, even in the Red Sea alongside the free passage of ships there, look increasingly under threat.

SoH re-opening looks, by US admission, far from certain and far from happening in the short-term. There are reports of a few tankers transiting the Strait with AIS on over recent days (some Indian LPG, once Pakistan carrying crude), but we are going to need much calmer waters and news streams to get the majority of owners sailing.

On the landed values that now “count” (i.e. excluding basically all our landed values out of the Middle East), the general trend is that we have seen some cooling in procurement costs, mostly via cooler freight rates ex-AG. Margins remain healthy enough in Europe, and for WoS crude landing into Far East, somewhat borderline.

Cracking margins into Southeast Asia on WoS barrels don’t look great, but the baseload/complex margins look pretty decent still.

A big question on that front remains the mindset, ability to take on the risk, access to SPR, access to Russian floating barrels, all of which will impact timing of WoS purchases from Asia.

Government measures to cut product exports (where applicable) and demand rationing measures also make a difference here. Indian refiners are currently heard continuing to balk at high procurement costs for LatAm, WAF, US, preferring to up Russian purchases and cut runs.

Another problem is the limited inter-changeability of medium sour AG grades with light sweets. Evidence so far suggests better appetite for the heavier WoS grades with JS, Mars, Guyana still all up a good $5/b m-o-m even if premiums fell late last week for some (we note a lot of volatility).

There might have been an early indication of Asia interest in the North Sea late last week with a Thai refiner heard taking Forties, albeit that saw limited impact on differentials. Forties diffs, alongside many other Brent-linked light sweets, are barely up at all m-o-m.

However, the longer SoH remains closed, the greater will be pressure to get products onto market, and West of Suez crude refined in the East will need to play a role in this too.

Lower freight rates would help get things flowing and here we saw a decent build-up last week, not yet enormous, of vessel availability in WAF, North Sea, USG, as ships left Hormuz to ply safe routes for good money.

As for Yanbu, we have seen a few VLCC fixtures to Indian refiners so far in March, but the vast majority looks to be going in the direction of the Far East which may make sense given its exposure and higher freight burden vs India, as well as contractual obligations.

I’d have perhaps thought that Europeans would get somewhat close to their normal fill of AG crude though Bloomberg reports that two European refiners will not receive normal contractual Aramco volumes in April, which will put the onus on spot WoS grades for replacement.

On WTI, TD25 rose w-o-w and this helped push out a volatile WTI/Brent paper spread once more, presumably alongside the incoming supply from US SPR. But WTI Arfas look nonetheless exceedingly cheap into NWE. Forties looks expensive vs WTI at least.

WAF looks cheap enough now into NWE particularly on the margin basis. Consequently as well, WTI looks very cheap in Asia versus Brent-linked, therefore surely one of the first targets once/if Asian refiners begin to ramp up Western purchases.

(WTI cheap into NWE)

I’ll be forgiven for not quite knowing what this all means for the Brent complex this week. There doesn’t seem to be anything really standing out as a trade (other than the cheapness of WTI) given all the unknowns and large moving parts.

And of course, safe to say, it really doesn’t feel as though physical and paper markets are through with pricing higher; this is only week three, and each passing week simply must see market desperation rise.