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Physical differentials have weakened, sharply in some cases, but this was to be expected given weak refining margins and with refiners still working through crude stocks that built up amid unplanned outages over April and May. The key to a physical crude rebound will be a recovery in margins, which in turn will depend on the health of the global economy.
We expect nearby Brent to remain weak for now (especially due to the jump in freight rates following recent tanker attacks in the Gulf), although downside is limited and deferred spreads still have upside. But with high-frequency data starting to show crude draws globally amid quickly rising geopolitical risks, flat price may finally catch up with spreads.
Once this near-term soft patch passes, we expect spreads to move higher again in the summer. Moreover, we have assumed (as has the market) that US crude production will grow sharply in H2 19, but there could be downside risk to these expectations. Indeed, at the inaugural Energy Aspects conference last week, several CEOs and senior representatives of leading US upstream, midstream and service companies suggested that US black oil production growth had already peaked or was close to doing so, but NGLs output was surprising significantly to the upside.
The view was not based on low price forecasts, rather it came from unprecedented investor focus on cashflow and a belief that Tier 1 acreage had been exhausted, which means that in the absence of substantial secondary recovery in shale plays (particularly in the Permian), production growth must slow. In a market so oversupplied with NGLs (and natural gas), black oil prices need to rise to offset for weakness elsewhere and carry the profit margin for producers.
|Atlantic basin diffs to Dated, $ per barrel||NGL as % of US liquids growth, 3MMA|
|Source: Energy Aspects||Source: EIA, Energy Aspects|