Time for physical to shine

Commentary summary:

• WTI has lately been landing at premiums to Forties in NWE.
• The sell-off in Brent/Dubai last week and low Brent diffs now sees North Sea and WAF light sweets landing close enough to Murban in Far East.

The cumulative sell-off in North Sea light sweet diffs over April and May has surprised even me. We called the (obvious at least in hindsight) top at $20+/bbl when margins were getting poor. Since then, the extent of the decline of diffs to levels essentially below 2024/25 averages is pretty crazy given the situation in the market.

It is not the case that we are suddenly glutted with crude, but market chatter has focussed on the slow pace of the recent cycle including a slow WAF clearance. There are important data points to talk about; China’s enormous decline in imports in April and recent re-selling of WAF cargoes are indicative even if the timing (barrels were bought weeks back) isn’t perfect.

Access to SPR has started to rise as authorities seemed to loosen their stance on tapping reserves, while Chinese players are probably still flat price sensitive as in the past. US is exporting max crude for now and both of those together with Yanbu, SPR, demand have done a job on the physical market.

From a trading point of view, it is probable that certain parts of the market have been waiting to see how this latest peace deal cycle plays out. It wouldn’t be great to be long an expensive cargo from the Atlantic only to have margins etc collapse on a peace breakthrough.

What happens now? It does seem this deal is going nowhere, and the arb setup dictates in that case that Brent-linked crude in particular is too cheap. Eventually refiners and traders are going to have to come out and buy for seasonally high runs ahead.

At least in the West, seasonality still counts for something at the moment, though in the East it’s more a case of running at whatever level is most economic (a combination of SPR access, Arab Light from Yanbu, WTI and LatAm, Russian, local grades). Meanwhile the Chinese may (and here I stress I am not totally convinced) start dipping into the market more with physical diffs now much lower.

(Narrow banding in key arbs East)

Until now Brent, WAF et al hadn’t factored too into the Asian replacement slate. That was more WTI and LatAm with Japan/SK recently locking in hefty volumes of August-landing WTI.

At the moment though we actually see Forties and Agbami landing at not too large premiums to WTI in August (note contango in MEH diffs on the USGC). Note also that some North Sea and WAF is not landing too much more expensive than Murban.

So some Brent-linked grade arbs look almost open East, while in Europe refiners have room to make sure the Brent arb East doesn’t actually happen in a big way.

There is a $5/bbl margin to be made on simple distillation on North Sea and light WAF in NWE. Forties too is landing at a $1/bbl discount to WTI Afras in NWE which tells us there should be at least some demand to bid this up.

(Brent simple margins are ample in NWE)

The stage is set for a rebound in Brent diffs as soon as the market gets convinced SoH remains closed for the foreseeable and needs to come out to buy for summer.

Note strong vessel availability of Afras and VLCCs in the USGC in the coming 14-day window. This should at the very least put a further cap on rates and help WTI price back firmly into where it needs to.

It might be an interesting signal for WTI/Brent to narrow too short-term, though we won’t make any firm recommendations on that today. The case for seeing the WTI Afra arb close to Europe this summer remains decently strong; higher seasonal runs in the US in the next month should help commercial inventory draw faster.

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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