For comprehensive analysis of the recent attacks on Saudi Arabian oil infrastructure, please see yesterday's e-mail alert. We will continue release updates as more information becomes available over the course of this week.
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Sour crude, sweet-sour spreads and VLSFO dominated conversations at last week’s oil market gathering in Singapore. Everyone agreed that flat price is not reflecting the strength in physical crudes, but no one wanted to bet on flat price given that unpredictable US foreign policy is influencing both supply (Venezuelan and Iranian sanctions) and demand (US–China trade war).
John Bolton’s sudden departure as Trump’s National Security Advisor is a case in point—the market feared an imminent shift in US policy on Iran and was deterred from buying deferred spreads or flat price. However, known Iran hawks Pompeo and Pence remain at Trump’s side. Yes, Trump has seemed desperate for a photo-op with Rouhani, but Iran demands the lifting of all sanctions before talks resume, something the US was unwilling to do even before it blamed Tehran for Saturday’s attack on Saudi oil facilities. Right now, new waivers look very unlikely.
Nonetheless, the market is asking whether sour crude curves are too strong compared to HSFO, particularly from Q1 20 when IMO 2020 kicks in. We believe deferred HSFO values are probably too low, given that no one is willing to take a long position during the transition period and that the historical correlation between HSFO and sour crudes has broken down. Not only have sour crude supplies plummeted, upgrading capacity at refineries has risen sharply.
This means that sour crudes will find a bid among complex refiners (as long as the conversion margin is positive) even as HSFO demand weakens, keeping the Dubai curve backwardated—albeit less backwardated than light sweet crude curves, as we expect 2-3 mb/d of global refining capacity (mostly in Europe) to switch to sweet crudes in order to eliminate HSFO production.
|Fig 1: Brent-Dubai forward curve, $ per barrel||Fig 2: Net conversion capacity increase, mb/d|
|Source: Refinitiv, Energy Aspects||Source: Energy Aspects|