Gone are those days

Published at 11:40 19 Aug 2019 by . Last edited 11:18 22 Aug 2019.

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

The physical market continues to strengthen as the Atlantic basin crude overhang is all but gone and Chinese demand is returning for the September and October crude cycles. Moreover, the export arb from the US to Europe shut last week (at least on paper on a pure delivered basis). Weaker Forties values should also help increase the pull of Atlantic basin crudes to the east, especially with Brent-Dubai spreads still narrow. All of this is coming at a time when European CDU works are being scaled back thanks to a recovery in refinery margins.

As such, Brent spreads should continue to recover. But the continued cuts in Saudi production (we expect steep cuts to exports to both the US and Europe for September loadings) and further declines in Iranian and Venezuelan exports (with PetroChina halting August loadings for the latter) continue to tighten sour crude availability. Together with the rally in diesel that is keeping upgrading margins positive, supporting some demand for sour crudes, we do not expect Dubai spreads to fall out of bed. Indeed, sour crudes will weaken but not by as much as HSFO cracks.

But the picture for flat price is blurry. A relief rally following a small de-escalation in the US-China trade war proved fleeting as disappointing macroeconomic data from China and Germany put the focus back on growth. Meanwhile, two-year US and UK treasury bills yielded more than the 10-year treasuries. Even though central bank quantitative easing has distorted bond market signals, there are few incentives for investors to take on risk when they can direct money into ‘risk free’ assets instead. While fear grips risk markets, it is hard to see how crude flat price can rally even as Brent spreads recover. The divergence between flat price and spreads is set to go on.

Fig 1: Brent and Dubai prompt spreads, $/barrel Fig 2:  Singapore 380 cst HSFO vs Dubai, $/barrel
Source: Argus Media Group, Energy Aspects Source: Argus Media Group, Energy Aspects

Log in to download

Other Perspectives publications

Rising in the shadows

Published 2 days ago

2019-11-11 Oil - Perspectives - Rising in the shadows cover
Users licensed for the data service can access our global balances.Both sweet and..

Read more

A tale of two balances

Published 1 week ago

2019-11-04 Oil - Perspectives - A tale of two balances cover
Users licensed for the data service can access our global balances.Both sweet and..

Read more

The silence of the hedges

Published 2 weeks ago

2019-10-28 Oil - Perspectives - The silence of the hedges cover
Users licensed for the data service can access our global balances.We believe thre..

Read more

Lost in misconception

Published 3 weeks ago

2019-10-21 Oil - Perspectives - Lost in misconception cover
Users licensed for the data service can access our global balances.West of Suez cr..

Read more

Market gets a freight

Published 1 month ago

2019-10-14 Oil - Perspectives - Market gets a freight cover
Users licensed for the data service can access our global balances.Freight continu..

Read more