Gasoline in wait and see mode ahead of summer & Hormuz repercussions

Commentary summary:

• Chinese buying weakness on the spot market can make a huge difference to physical crude.
• WTI and Murban just about fair value now in Asia, in terms of arbs.
• North Sea priced out of the East and struggling still with cheap-ish WTI.

There may or may not be an interim deal in the making at some point in the future.

As has been the case through the war, it is very difficult to read into the real intentions and thus the chances for real progress towards peace.

By the time you read this there of course be a different short-term outlook emerging in the headlines.

There was lots of consequence over the week to sift through. The partial blockade of Iranian oil simply takes more oil off the market. But the physical crude market in Europe and Asia has continued to deflate.

There’s a lot going on here. For one, physical Brent had to collapse as European margins were kaput. Margins look better now.

In the East, Murban and Oman premiums have now been reigned in towards the $5-10/b market and are perhaps actually worth looking at again from a fair value perspective.

What has changed is that Japan, South Korea are taking maximum WTI and have access to substantial volumes of SPR crude too. Japanese run rates are simply low as well.

But possibly more impactful is the collapse in Chinese imports. We will assume this continues and that Chinese buying on the legit spot market remains lacklustre.

Indeed, the re-selling of WAF cargoes by Chinese majors last week was very interesting; we relate this back to the increasing willingness of Chinese authorities to make use of their huge SPR, as well as some cuts to SOE runs, and plans to up Russian crude purchases (and HSFO).

As the largest crude importer in the world by far and a key group of actors in physical crude trading, as always, if Chinese buying drops away, physical crude can be moved substantially.

We assume that at least some of the motivation to ramp up or ramp down physical buying will be flat price and/or premiums, as is often seen historically as the case. $107/bbl Brent ($10/bbl premiums plus freight) is probably not attractive for now.

(WTI and Murban about fair value relative to each other in Asia)

As for landed diffs into the Far East, these have converged quite nicely towards a range of $15-25/bbl mark for a lot of the key crudes that need tracking in the world.

WTI and Murban are landing reasonably close to each other in SE Asia, with Murban cracking margins actually edging ahead of WTI VLCCs for July delivery.

Oman also has a clear advantage over Arab Light. Mars looks quite open into Asia; that is partly the SPR effect in the US, plus USG access to Venezuela, but the Mars arb is not going to be very high volume so we should also not read too much into it.

More interesting was the announcement of Mexican crude heading to Japan for July delivery.

That seems to have had government intervention as part of the process, but the US is now longer medium sours and in preliminary data looks to be rejecting LatAm imports; this rejected crude needs to head East for the most part.

And indeed Tupi looks about fair value into Far East against Arab Light. We know Brazil –> East is picking up to even higher levels now.

WAF medium/light and North Sea mostly still look a touch too expensive and would need their premiums (or freight) to come off another $5/bbl before the arb make sense.

We should remember that what would normally be a very clear-cut “closed” arb signal for North Sea/Europe should be taken with a lot of caution in this market.

But closed European arbs “make sense” still to me as Europe should not long be in the position where they are losing too much volume to the East.

Eastern run cuts simply need to accelerate over time once SPR options get harder.

We’ve been adjusting our load structure methodology on Brent last week, and in Europe WTI Afra margins now look pretty much bang on with Ekofisk margins in NWE.

That looks fair value, though Suez cargoes for WTI into Europe are very attractive with their margins only threatened by Sverdrup and Bonny Light (not exactly a fair comparison on the API front but still).

(Tightening Afra count in the USG)

On that basis there is definitely no need to see TI/Brent future any wider; that spread has done the opposite of what I called for last week (though I was talking more a deferred/delayed action once US crude draws get big enough).

The volatility in TD25 is the big driver for now, as well as geopolitical premiums rising in Brent, but at least the freight rate spike last week actually made sense directionally with a tightening Afra count in the USG.

Hard to be swimming against that particularly in the front spread just now. But I still see the big draw on total US crude inventory as one of the key trades going forward if a good entry point can be found.

About the Author

Neil is a senior oil market analyst specialising in crude oil, refined products, and biofuels, with particular depth in refining economics, fundamental strategy and price modelling. He has held analytical roles at OilX and JBC Energy, and his market intelligence is regularly cited by Reuters, Bloomberg, and the Wall Street Journal.
Connect: https://www.linkedin.com/in/neilcrosbyuk/ https://x.com/NGCanalyst

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