The market is getting tired of waiting for tighter balances, and their arrival date has been pushed back to Q4 18 thanks to GCC and Russia raising production pre-emptively before the market loses Iranian barrels. Unless the prompt overhang—which has lasted for a bit too long—clears, it will be hard for prices to rally, no matter how tight future balances look. But it is also hard for the market to go short at a time when outages are on the rise and the US administration is crystal clear about its desire to drive Iranian oil exports to zero. This is a classic stalemate.
Brent spreads are taking the brunt of the impact of this prompt oversupply, with higher Murban and AXL output from the UAE and Saudi making it impossible for Forties to arb east, especially as Asian gasoline cracks have slumped, forcing one Korean refiner to mull run cuts. Closed US light export arbs, recovering naphtha and distressed WAF clearing due to higher Indian and LatAm runs all point to stronger Q4 18 Brent spreads, but the prompt is dictating proceedings for now.
The exact opposite is true for WTI. Prompt spreads are skyrocketing as Cushing stocks near tank bottoms and, with rumours that the return of the 0.35 mb/d Syncrude upgrader could be delayed, the strength in light crudes north of Cushing may persist for longer. Right now, the market is sending the signal that refilling Cushing will be a problem throughout the summer.
Yet, the prognosis for Q4 18 WTI is also the exact opposite of Brent. Hefty PADD 2 refinery works, the risk that Trump releases US SPR, deteriorating US light crude export arbs at a time when China may cut US crude purchases because the trade war between the two countries has now officially begun can all directly or indirectly weigh on WTI, but not until the prompt tightness abates.
|Brent and WTI prompt spreads, $/barrel||Singapore cracking margins, $/barrel|
|Source: Argus, Energy Aspects||Source: Reuters, Energy Aspects|