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We expect October loadings to rise as refiners return from maintenance, Johan Sverdrup ramps up production, and more US crude hits the water from new Permian pipelines to the USGC, trends that should persist into November. Brazilian production increased, by 0.22 mb/d m/m in July to a record high 2.78 mb/d, after gas processing delays were resolved at Buzios, allowing exports to grow in Q4 19. The latest JMMC meeting focused on compliance, forcing Iraqi and Nigerian ministers to pledge stricter compliance over Q4 19, although we remain sceptical. Even now, high Iraqi exports are being offset by overcompliance from Saudi Arabia and Kuwait while Iranian exports remain near zero. Increased Atlantic basin exports remain partially in check with US arbs to the east shut and upside risks to US production growth eliminated. Furthermore, any further US sanctions on Venezuela could reduce the country’s production.
The US-China trade war ratcheted up this month with China enacting a 5% tariff on US crude oil imports. At least two VLCCs originally routed to China from the US were diverted to South Korea while other parcels were resold to Reliance. China is expected to increase African, Brazilian and European liftings as runs rise. Tariffs on US crude and a volatile US export arb, along with the influx of Permian crude arriving on the USGC this month, all weighed on WTI-Houston vs Brent in order to keep US crude attractive globally. WTI-Brent remained strong at an average $4.89 discount so far for November trade, after spot tariffs from competing pipelines to the USGC were slashed to ensure that they remain full.
The Brent complex rebounded thanks to renewed Chinese demand, with Brent-Dubai back above $3 per barrel for the start of November trade. Consequently, local crude differentials in the Far East should remain well supported. Prompt Brent and Dubai spreads are both near triple-digit backwardation, the former due to Chinese buying and as IMO increases demand for light sweet crudes in general, while the latter is due to continued losses of medium and heavy sour crude supplies from Iran and Venezuela.
Distillate cracks hit the highest levels seen this year in September and along with lower HSFO cracks, indicate IMO 2020 is approaching. As a result, low-sulphur, distillate-rich grades continue to price strong, especially West African grades. Meanwhile, Urals differentials in Europe fell to levels that became attractive to Asia, with at least three VLCCs headed to the region for October arrival. Freight rates have crept up for VLCC and aframax fixtures, with the former hitting levels not seen since May
Middle Eastern OSPs were cut to Europe, reflecting a weaker European sour market, but increased to the East (by more than expected) and slightly to the US. Mars and other USGC sours should remain in the USGC especially once October refinery turnarounds are complete unless differentials fall even further after 10 mb of sour SPR barrels are released in early Q4 19.
Although weaker fuel oil prices as we approach IMO 2020 will reduce demand for sour crudes, the removal of medium and heavy sour crude supplies moves marginal economics for these grades from topping plants to complex refiners, keeping a floor under sour crudes and preventing sweet-sour spreads from widening too much.