Notwithstanding a bit of softness at the front of the Brent curve, physical crude differentials are improving. The return of Indian crude buying after a prolonged refinery maintenance period is supporting Nigerian differentials, while Chinese and North Asian refiners are switching to lighter grades—much like European and US refiners—due to the strength in heavy crudes. This has meant sour crudes have come off their highs, but has led to concerns about demand in the east.
Even though China has likely overbought 0.30-0.35 mb/d of crude over H1 17 and murmurings of run cuts amongst both majors and teapots means crude buying is coming in stops and starts, we calculate that Asia still needs 21 mb/d of crude across H2 17. While this is higher y/y by just 0.25 mb/d and lower than H1 17’s short of 21.34 mb/d, it is still sizeable and floating storage is drawing.
Another factor that has reduced Asia’s crude needs is far more planned and unplanned refinery works, so much so that since April, despite dismal LatAm runs, West of Suez refinery runs have risen y/y by over 1 mb/d, while East of Suez run rates moderated. The growth in European runs have exceeded Asian runs for the first time since 2003. Asia has resorted to importing products, and the west has stepped up to fill the gap, resulting in stronger crude draws in the west.
Unsurprisingly, the US is now the strongest crude market globally, although the obsession with the east means traders keep pushing barrels there even when demand is in the west. Interestingly, despite global refinery runs tracking higher y/y by over 0.7 mb/d in H1 17, products stocks are falling fast, indicating stellar demand. So currently, product markets are rebalancing quicker than crude, but as long as the strength in demand persists, crude will follow suit.
|Fig 1: Crude inventory vs 5-year average, mb||Fig 2: World runs, y/y change, mb/d|
|Source: IEA, Energy Aspects||Source: Government sources, Energy Aspects|