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We expect November loadings to increase m/m as production ramps up at Johan Sverdrup, with volumes initially moving east before European refiners increase their take. Further increases will come from: recovering Saudi exports, strong refinery runs amidst a recovery in margins, a ramp-up of Brazilian production, and more US crude from new Permian pipelines to the USGC hitting the water. However, risks remain. Unrest in Ecuador led to production disruptions, with Petroecuador declaring a force majeure on exports. Nigeria has already experienced several disruptions at the Bonny Light terminal and Venezuelan output has taken another step down. Moreover, soaring freight rates are curbing appetite for long-haul barrels.
The 14 September attacks on Abqaiq and Khurais disrupted nearly 5.7 mb/d of primarily Arab Light crude production. The Kingdom has supplied its commitments to its customers with supplies from domestic and overseas storage (primarily facilities in Okinawa and Sidi Kerir) as well as by cutting domestic refinery runs. However, Saudi loadings ultimately fell m/m by 0.39 mb/d in September. In addition, several customers—primarily in Asia—have been asked to take substitute barrels of medium and heavy crudes, increasing demand for alternative super light and condensate in the region. We expect loadings from the Kingdom to recover over October and November, although the grades mismatch will remain.
Freight rates spiked after the US imposed secondary sanctions on six Chinese companies, including subsidiaries of Chinese state-owned shipping company COSCO (see E-mail alert: Freight soars after US sanctions Chinese firms for dealing with Iran, 27 September). A combination of vessels being tied up at dry dock and some companies banning ships that have called at Venezuelan ports in the last year has added to the shortage of vessels. High freight rates have pushed western grades lower while some eastern grades have benefited, as buyers look to avoid costly long-haul voyages. VLCC rates spiked enough to trigger Urals movements to Asia on Aframaxes, with strength spilling into other vessel classes. WTI-Houston came under pressure to keep the arb from the west open and was priced at -$3.18 versus Brent on 14 October. If elevated freight costs persist, either WTI-Houston must fall further or WTI-Brent must widen to incentivise pull from the east.
Margin strength during maintenance season has sustained crude buying interest, even with elevated differentials. Crude buying for post-maintenance runs is clearly underway. Margins have been further bolstered by the Saudi Arabia disruption, as the Kingdom cut runs at its local refineries in order to free up crude for exports. We expect product loadings to normalise this month, but margins should remain supported with shifts to IMO 2020 underway.
Middle Eastern OSPs were cut again to Europe, reflecting a weaker European sour market, but increased to the east as Dubai’s backwardation strengthened further. While most moves were in line with expectations, Arab Light to Asia topped expectations reflecting the difficulty Saudi Arabia has had restoring production of the grade. Most light arbs (including Forties) to the east are shut, while Urals and heavy Latin American arbs remain open. The Med faces the opposite scenario. In Northwest Europe, African grades have been priced out of the market and US grades are difficult to work due to high freight. Most Middle Eastern grades remain favourable.