Summertime sadness

Published at 12:09 29 Jul 2019 by . Last edited 11:18 22 Aug 2019.

Users licensed for the data service can access our global balances.

The prompt Brent spread collapsed spectacularly last week, largely driven by a bear play but also due to much-publicised fundamental factors such as the PES closure backing out 20 mb of crude and heavy European refinery maintenance in September and October. But beyond the prompt spread, the backwardation in the Brent curve has steepened just as the physical market has started to perk up again, led by a recovery in East of Suez demand. Apart from an overhang in some Nigerian and North Sea cargoes, the physical market has cleaned up in just three weeks.

Despite deferred Brent spreads strengthening, we still believe they are under-priced. Regardless of the quality issues with Forties and the upcoming Dated Brent contract change, Brent spreads should be more backwardated than Dubai going into IMO 2020 as Middle Eastern crudes contain more sulphur than Forties. Right now, Dubai spreads are possibly benefitting from positioning ahead of the Pemex hedging, as Pemex has allegedly swapped Dubai for fuel oil in its formula.

So, we expect Q4 19 Brent-Dubai spreads to widen. But WTI-Brent may not narrow in Q4 19 given the recent weakening in WTI-Midland differentials amid refinery outages and unsubstantiated rumours about Permian pipeline delays. Cushing stocks may not fall below 30 mb by year-end.

Beyond the micro factors, global demand concerns are the main driver of oil markets right now. Supply losses and the continuing decline in global crude stocks (US, ARA and Japan crude stocks fell by 16.5 mb last week and by 47 mb since early June) will put a floor under prices and spreads, but without a boost in demand, Brent is likely to wallow in relatively shallow backwardation. There are early signs that Chinese demand may be improving but we need more data to know decisively.

Fig 1: US+Japan+ARA crude stock change, mb Fig 2: WTI-Cushing - WTI-Midland spread, $/bbl
US+Japan+ARA crude stock change, mb WTI-Cushing - WTI-Midland spread, $/bbl
Source: EIA, PAJ, Bloomberg, Energy Aspects Source: Argus Media Group, Energy Aspects

Log in to download

Other Perspectives publications

Game of drones

Published 4 days ago

2019-09-16 Oil - Perspectives - Game of drones cover
For comprehensive analysis of the recent attacks on Saudi Arabian oil infrastructure, please see..

Read more

Shale’s twilight hours

Published 1 week ago

2019-09-09 Oil - Perspectives - Shale’s twilight hours cover
Users licensed for the data service can access our global balances.The sharp rally..

Read more

Broken correlations

Published 2 weeks ago

2019-09-02 Oil - Perspectives - Broken correlations cover
Users licensed for the data service can access our global balances.We have rarely..

Read more

Right said sour spread

Published 3 weeks ago

2019-08-27 Oil - Perspectives - Right said sour spread cover
Users licensed for the data service can access our global balances.The continued d..

Read more

Gone are those days

Published 1 month ago

2019-08-19 Oil - Perspectives - Gone are those days cover
The physical market continues to strengthen as the Atlantic basin crude overhang is all but gone..

Read more