Soured up

Published at 12:23 18 Apr 2017 by . Last edited 17:32 18 Apr 2017.

Away from all the daily range-bound trading, there are some strange things going on in the oil market. The Brent-Dubai EFS has narrowed to below $1, yet June/July Dubai spreads are -55 cents. A narrow EFS should be supportive for Brent and WTI spreads as this allows for more arbitrage crude flows. Yet, traders will be quick to point out that the arb for both sweet and sour barrels into Asia is shut, as Asian physical crude differentials, particularly sours, have weakened sharply.

Clearly, this cannot be the new status quo, especially as USGC sour crude export arbs are shut and will remain so as US runs are set to rise by 0.49 mb/d q/q in Q2 17, which will result in complex USGC refiners consuming and importing more sour grades. With some refineries set to receive less Kuwaiti and Saudi crudes in May, US sour crudes can firm even with a closed export arb.

Anecdotal reports suggest Gulf Coast refinery demand for sour crude is so firm that some GoM sour crude exports may be cancelled in favour of domestic sales. Planned works at Shell’s 0.1 mboe/d Perdido offshore platform and outages in synthetic crude supplies in Canada are also supporting, as buyers are having to lift alternative dilbit grades (bitumen + condensate/C5+).

This means Asian sours should rise, although this may take a few weeks given China stockpiled a record 1.3 mb/d of crude in March, as teapots fear delays to their June quota renewal. This explains the current lull in Chinese buying, which together with available floating storage in the region is currently weighing on regional differentials. And until Asian grades firm, Brent spreads will remain weak, especially as a large volume of US crude is headed to Europe. This, in turn, will weigh on US lights, which need to discount further, amid a growing glut of light naphtha.

Fig 1: Brent-Dubai spread, $/barrel Fig 2: LLS month 1-LLS month 2, $/barrel
Brent Dubai Spread LLS M1 - LLS M2
Source: Argus, Energy Aspects Source: Argus, Energy Aspects

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