According to our crude balances, Q4 18 is set to be the tightest quarter in over a decade and tighter than any quarter we are currently predicting for 2019, due to the steep decline in Iranian exports, a lack of any near-term spare capacity and the resurgence of Chinese teapot buying, which pushed ESPO differentials to a massive $6 above Dubai. Teapot buying will ease again from January while new OPEC supplies will also help from Q1 19, but none of this helps now.
This means the only way to balance in the short run (barring a large SPR release or destocking by crude exporters) is through a significant compression in refining margins that reduces crude demand—and that is what is happening now. Med refiners are starting to trim runs already.
But this does not imply weaker crude timspreads. As long as the east remains strong, it will pull barrels from the west and, in order to balance the market, West of Suez refining margins will have to be compressed. Even with marginal arbs, flows out of the US to Asia are extraordinarily high.
What the market has missed is the fact that we have only been able to sustain hefty US exports by drawing down US crude stocks—which are now below 400 mb—rather than those being fed by higher production. Now, with Cushing flirting with tank bottoms yet again, refilling Cushing must be a priority and cash WTI has ripped as a result. This means a narrower WTI-Brent arb, which may choke off exports just as the world is crying out for every drop off crude. In short, we should see timespreads across all three benchmarks—Dubai, Brent and WTI—rise in tandem, pulled higher by a complete lack of crude availability in the east, where refiners are reporting instances of some grades being sold out. The physical side does not get better than this.
|Brent, WTI and Dubai timespreads, $/bbl||Global liquids stock change, mb/d|
|Source: Argus, Energy Aspects||Source: Energy Aspects|