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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|