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The pullback in Chinese buying will continue to keep the physical market soft in the near term. However, Brent spreads have caught a bit of a bid, so positioning could overpower fundamentals for a short time. Our concern is that if this is a bull play like last year, it may swamp the North Sea market with US crudes this summer. This year, however, simple refining margins are strong, Q2 European refinery works are substantially lower y/y, and crude demand should be stronger as refiners start running hard to make diesel ahead of IMO 2020.
Moreover, the bunched-up cargoes due to Turkish Straits delays have mostly been absorbed without creating an inventory overhang, Urals diffs are recovering having come under modest pressure as Russian refinery works backed out crude for exports and demand prospects are looking up. Indeed, Beijing is shoring up its economy with measures focussed on infrastructure.
There is also potential for further supply losses (even if temporary) due to uncertainty around Iran sanctions, as buyers may reduce buying ahead of the 5 May waiver renewal deadline, just as risks around secondary sanctions on Venezuelan exports are rising. Near-term support for Atlantic basin light crudes will also come from maintenance at the Kashagan field lowering CPC exports in April and May and then, at Ekofisk and neighbouring fields in June.
Still, we are not structurally bullish lights; the tightness is being led by mediums and heavy crudes, exacerbated by Saudi cuts. But the stars could align in the coming weeks for light crudes to perform especially if complex refiners resort to running lights in the absence of heavier grades, just as new Asian refiners designed to run sour crudes suck up Saudi sour crude spare capacity.
|Iran crude and condensate exports, mb/d||Chinese crude imports, mb/d|
|Source: Kpler, Energy Aspects||Source: China customs, Energy Aspects|