Exorcising the demons of 2018

Published at 11:07 13 May 2019 by . Last edited 11:18 22 Aug 2019.

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Prompt Brent spreads have hit triple-digit backwardation, following Dubai spreads, on the back of growing needs for clean crudes to deal with the contaminated Russian oil. While operations on the Druzhba pipeline’s southern leg are gradually resuming, the northern leg remains shut and Ust-Luga cargoes are still contaminated, albeit at lower levels. It will take months to clean this, keeping the bid on waterborne crude. Russian output will be reduced until the pipeline starts up.

But the financial market is largely ignoring the impact of the Urals contamination, claiming that these are not ‘lost’ barrels (forgetting that we need up to 10 times the volume of clean crude to make this tainted oil usable unless it can be thrown into power generation). It also continues to fear that Saudi Arabia is preparing to ramp up output sharply. News that Aramco has offered some of its Asian buyers extra crude to offset lost Iranian exports has spooked the market, but this is within their quota limits as they move output from 9.8 mb/d to 10.3 mb/d. In some cases, they have offered to swap the quality of crude for lighter grades, which refiners have rejected.

Even the timing of this year’s events is different to last year’s, let alone the state of the physical market. Last year, the US announced waivers during peak global refinery works as we entered winter; today, runs are set to rise by nearly 5 mb/d between April and July as is crude burn.

Finally, the rally in the physical market hasn’t been due to rampant buying by China either, unlike last September. China amassed huge stocks in April, particularly from Iran, which they can run down with peak refinery works ongoing. But they are likely to return for August loaders. So, even if the rally in physical markets and timespreads pauses, further tightness lies ahead.

Brent and Dubai prompt spreads, $/barrel Rostock and Gdansk crude arrivals, mb/d
Brent and Dubai timespreads Rostock and Gdansk crude arrivals
Source: Argus Media Group, Energy Aspects Source: Kpler, Energy Aspects

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