Looks like worst-case scenario is here to stay

Commentary summary:

• Physical crude, at least in Europe has gotten so strong as to really put too much pressure on European refining margins.

• In a different market we might be tempted to say WTI/Brent needs to narrow particularly towards the end of Q2.

• The 3.5-4.5 MBD incremental crude coming out of Yanbu may be short-lived too.

With talks now broken down the US is planning to blockade Iranian oil. How this will work is unclear, particularly the general logistics of it, and particularly given circumstances where the vessel owner is sensitive (‘allied’ or not).

Next also comes the Iranian response to these actions. Red Sea and/or Yanbu/Petroline are at risk as ever. Attacks last week on pumping stations on Petroline might well be the first in a series. So the 3.5-4.5 MBD incremental crude coming out of Yanbu may be short-lived too.

Flat price ripping on these notions makes sense. But what will be the US administration’s next attempt to cool futures pricing? The physical oil market in crude and products is the real indicator of tightness and in fact physical crude, at least in Europe has gotten so strong as to really put too much pressure on European refining margins.

At these levels of physical diffs and product cracks, Europe will be cutting runs. Evidently Asia is cutting runs too – visible already in Japanese utilisation data.

Preliminary import data are tending to show large drop-offs in crude imports into Far East, including China. All as expected.

For physical European crude though, the top might well be in and there is a need even to cool off, combined with a stronger product cargo market, to get margins a bit healthier.

Some utilisation at risk in Europe might even make sense, but baseload operations shouldn’t be at risk. In Asia the calculus is a little different and so far the target grade is rather WTI whose margins are still more solid.

LatAm/USG diffs are generally substantially weaker than in Europe, possibly on account of freight risk, preference for short-haul even in Europe, and with LatAm generally now the longest (and growing longer) crude region globally.

You could even be forgiven for thinking that the likes of Mars is staying low enough to compete with available Arab Light out of Yanbu; our landed values for both grades into Asia remain basically at the same level.

(Arab Light and Mars landing at parity in Far East)

WAF Suezmax and VLCC vessel supply is growing and rates are beginning to reflect that plus poor margins in key landed locations. USG Afra supply is now substantially higher too and back up to 90D moving average levels in recent days.

TD25 related rates should reflect that. VLCC avails in the USG are still tight. This should all help WTI clear more and more abroad. April exports are scheduled particularly high already with Asia the key growing destination. Eventually we will hit WTI export capacity limits.

But expect US commercial inventory to start to draw in earnest soon.

In a different market we might be tempted to say WTI/Brent needs to narrow particularly towards the end of Q2.

Afra rates are of course a big driver here, but in terms of fundamentals we should expect US commercial inventory to draw rapidly particularly once PADD-2 intake rebound seasonally and PADD-3 runs, exports, are maxed. SPR draw in the US has been tepid to far.