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Crude markets are set to enter a constructive period as refiners return from maintenance. By July, worldwide refinery maintenance will have fallen by 5.3 mb/d from peak April levels, and even if runs fail to rise by as much due to an extraordinarily tight crude market which has weighed sharply on margins, we are entering a period of peak global runs.
Yet, supplies remain constrained. US sanctions on Iran featured prominently in April, after the Trump Administration did not renew Significant Reduction Exceptions, or waivers, to eight countries in an effort to drive Iranian oil exports to zero in May. While China and other counties will still import smaller volumes, at least another 0.7 mb/d of Iranian production must be shuttered once Iran exhausts floating and onshore storage. Meanwhile, Venezuelan production could fall further from 0.7 mb/d in April. So even if Saudi Arabia reduces a portion of its overcompliance and raises production towards 10.3 mb/d in June (which is their quota), crude markets are still set for significant stockdraws of almost 1 mb/d. As a result, refiners are scrambling to get barrels, with rare trade movements such as Escalante into Europe, Kraken to India amongst others continuing.
Aside from sanctioned exports, European and Mediterranean upstream maintenance is significant, with Ekofisk loaders down by 0.25 mb/d for June due to work at the terminal and at Valhall and Ula; with CPC loaders from Novorossiysk down by over 0.20 mb/d from February to May due to work on Kashagan and other streams; and with smaller North Sea maintenance programs underway at Magnus, Thistle, Dons, Heather-Broom, Alma-Galia, and the Maria field, to name a few. The 70 thousand b/d Goliat field is also conducting maintenance mid-year, and even Forties has maintenance on the Charlie platform, on the Graben export line and on one of the trains at Kinneil in August that will impact production by over 40 thousand b/d. Further south, Angolan lifters are struggling while unrest in Nigeria has curtailed production of several crude streams this month even though the Bonny Light force majeure has now been lifted. And while Libyan production remains over 1.1 mb/d for now, any spill over from General Khalifa Haftar’s conflict with the government in Tripoli west toward Zawiya could impact exports. But the most significant impact being underappreciated by the market relates to organic chloride contamination along the northern leg of the Druzhba Pipeline in Belarus, Poland and Germany and at Ust-Luga, which has corrupted as much as 30 mb of crude, some of which sits unsold on 13 aframaxes in the Eastern Atlantic. While run cuts is solving a portion of the issue, most of the contaminated crude will have to be blended off.
April total seaborne loadings were down by 0.22 mb/d m/m and by 0.44 mb/d y/y to 45.32 mb/d as a jump in Pacific and Mediterranean liftings failed to offset reductions in Latin America, the North Sea and North America. May and June loadings will rise somewhat on higher West African and Middle Eastern ex-Iran loadings but actual Russian exports will be down sharply due to the Urals containment issue. Even if refineries are balking at high crude prices, ultimately we see more flows to Asia as new refineries start-up, while the west will have to balance by reducing runs. Brent has marched into strong backwardation at the front while sour differentials have surged in the East, the North Sea and the Gulf. Refiners will face a more competitive supply market in the weeks ahead: it is only a matter of time before outright prices take notice.