Iran Update – 10th April – 12:00 CET – Physical crude at its limits?

‘- There are now relatively few crude grades that have workable complex margins in Europe or Asia. Particularly the arbed replacement crudes in Asia are at risk, excepting WTI. In Europe many major local grades aren’t workable and our complex/coking margins are only so relevant to the less complex region. Cracking is deeply negative.

– The major issues are: 1) crude physical premiums have probably gone too far; 2) overall product cracks are too low (!) particularly down the curve; 3) freight is overall too high.

– At this rate even Europe will have to cede some utilisation, perhaps as of next month. One can see the argument for this needing to happen as there is simply a shortage of crude so crude premiums need to play a role to crowd out weaker setups. But it looks like physical crude has reached its limits with too many setups and grades now crowded out.

– It’s hard to argue for much downside to USG origin freight, particularly TD22 to Asia where loadings are skyrocketing. TD25 Afra rates might be at a little more risk given vessel avails and if physical Brent starts to come under pressure (and with flows to Europe reportedly declining, ‘replaced’ by flows to Asia). WAF rates are already under pressure and vessel supply of Suezmax and VLCCs has risen. This might continue if margins into Europe just don’t work.

– In a less volatile market we’d wonder if deferred WTI/Brent might be worth a buy. US (total) crude stocks should surely soon start to draw hard, given booked April exports that could even approach export capacity limits, and presumably strong runs on cheap local crude. SPR release slows this process a little in terms of where commercial inventory ends up. Cushing needs to start drawing too with help from strong MEH diffs and a seasonal recovery in PADD-2 intake.

– It’s perhaps harder to be long paper cracks and spreads in products for similar reasons as in crude futures (headline risk). So physical premiums in products might have to do more work to help margins out.

– There are still going to be temporary dislocations to watch out for day on day. It makes sense to us for the HOGO to stay low, perhaps the low single digits (as we said earlier in the week). PADD-1 diesel stocks are really not that low (+10% y-o-y) given the market backdrop, and US diesel exports need to stay workable.

– Sing May jet regrade at $13/b looks like a sell short-term if there’s enough of a market, and/or jet E/W a buy given it is still deeply negative and overall Asia doesn’t look to be pulling any cargoes at all from the West basis arbs.