The great oil divergence

Published at 11:14 7 May 2019 by . Last edited 11:18 22 Aug 2019.

The market is yet to fathom the full impact of the Russian crude contamination issue, which is now leading to outright production shut-ins, nor has it understood from the potential implications of the failed uprising in Venezuela for the country’s production profile. But most of all, the market is still questioning whether the Trump administration will follow through with its policy of zero waivers for Iran and is petrified of rumours that suggest Saudi Arabia is increasing production for May, with a number of Asian buyers being offered extra crude.

As a result, we have a great divergence in the making, with Brent flat price falling by 2% w/w (Trump’s tweet threatening to impose 25% tariff on $200 billion of Chinese goods will weigh further) just as timespreads across Brent and Dubai have soared. Physical differentials have also rallied further, with Basrah Heavy diffs at record levels. This is perhaps the widest divergence we have ever seen between the strength in the physical markets and the weakness in flat price.

Expectations that Saudi Arabia should keep production below 10 mb/d going forward are grossly misplaced and unrealistic. Even with the Kingdom’s output between 10.1–10.3 mb/d in May and June and Iranian exports at 0.6 mb/d, we see global crude stockdraws of around 1 mb/d in Q2 19.

The physical market is reflecting this and there could even be further strength ahead given Russia has had to shut-in 1.3 mb/d of production for five days till 7 May. The curtailment could last longer as cleaning the pipe will be a lengthy process, and waterborne exports will be cut. Venezuelan export may also fall further too, as the US is likely to squeeze the country economically, implying further sanctions, following the failed uprising against the Maduro regime last week.

Oil prices and spreads, $/barrel Urals differentials to Dated Brent, $/barrel
Oil prices and spreads Urals differentials to Dated Brent
Source: Argus Media Group, Energy Aspects Source: Argus Media Group, Energy Aspects

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