Notwithstanding the recovery in Brent spreads from overdone levels, the overall collapse in spreads last week has cast doubt on oil market balances, especially against a backdrop of rising expectations that OPEC+ will raise production by 1 mb/d. But by definition, just before the draws start stocks are at their highest level and physical markets should be fast nearing the bottom.
While prompt Brent spreads will struggle to perform until June North Sea cargoes find a home, we remain confident they will. Refining margins have perked up across the world, and are now above year-ago and five-year average levels. Even topping margins have moved into positive territory everywhere, lifted by the rise in global fuel oil cracks, auguring well for crude demand.
Moreover, US exports should be coming off following the rally in USGC crudes, which should help take the pressure off light crudes in both the Atlantic basin and in the east, which in turn will allow Forties to compete in Asia again. At the same time last year, we had the same kind of overhang of sweet crudes in the Atlantic basin for exactly the same reason. US crude exports tend to be higher in the spring and early summer due to refinery works, and these barrels arrive in Europe and Asia when crude demand is lowest there. Last year, the market started to rally from late July as US exports fell over the summer—we expect a repeat of that this year as well.
The only thing that could derail this recovery is OPEC, should it decide to increase output by 1 mb/d, although mounting losses from Iran and Venezuela would still offset a large part of this. Our base case is still for a 0.5 mb/d increase, but we warn there will be a barrage of bearish news ahead of the 22 June meeting as Saudi Arabia is keen to push prices lower to appease the US.
|Brent spreads, $ per barrel||Saudi crude exports, mb/d|
|Source: Datastream, Energy Aspects||Source: Kpler, Energy Aspects|