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The continued drop in Iranian, Saudi and Venezuelan supplies has tightened sour crude markets so much that even as HSFO demand and cracks have started to falter ahead of IMO 2020, sour crude prices have rallied. Venezuelan crude supplies could fall even further if CNPC’s move to halt August loadings from the country is rolled over to September loaders or beyond. Should Indian refiners also scale back on Venezuelan purchases in the next trade cycle, fearing secondary US sanctions, East of Suez sours will rally even further. If this means that Venezuelan exports drop close to zero, Dubai prices can hold on to their recent gains ahead of IMO 2020, perhaps even narrowing the Brent-Dubai spread to less than $1 (or even flip briefly in an extreme case).
If Venezuelan exports manage to stay around 0.7-0.8 mb/d, then Brent-Dubai is unlikely to narrow further especially given a large part of the move was down to short-covering. Nonetheless, with sour crude supplies tight and a significant expansion of the world’s capacity to upgrade vacuum residue, the downside to sours will be limited. In a nutshell: in a tight crude market, while sweet crudes will be in enormous demand, sour crudes will not fall much, even as HSFO markets weaken materially, helping global crude prices (across all grades) rally; in an oversupplied market, sours will drag the complex lower and will underperform sweet crudes substantially.
For now, given tight physical crude markets, we expect sour crudes to lead the market higher. Already, some sweet-sour switching is underway, which should start to support Brent spreads. This is particularly true given narrow Brent-Dubai spreads and with China’s decision to slap 5% tariffs on US crude imports, which should support Chinese buying of North Sea (Forties) crudes.
|Fig 1: Oman differential to Dubai, $/b||Fig 2: USGC coking spread, No 6 FO vs ULSD, $/b|
|Source: Argus Media Group, Energy Aspects||Source: Argus Media Group, Energy Aspects|