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Crude oil tests $80/b mark amid escalating uncertainty

The second quarter of 2018 saw the Dated Brent market break briefly above $80/barrel for the first time since November 2014, buoyed by escalating geopolitical risk as US President Donald Trump moved to pull out of the Iran nuclear deal, throwing the future of Iranian supply into heavy doubt.

The spike in crude prices — and the resultant spike in prompt backwardation — had a pronounced impact on every crude market, causing many differentials to plunge to multi-year lows, attracting record flows of US crude into the region, and closing arbitrage windows for crudes that rely heavily on Asian demand to sell.
While the market pulled back slightly as trading moved into June, geopolitical and macroeconomic risk are likely to continue to play a major role in the market moving forward as a looming trade war between the US, China and the European Union, as well as renewed unrest in Libya, is likely to increase market volatility.

Furthermore, the end of refinery turnarounds in Europe and the start of the driving season are poised to boost the local consumption of North Sea crude oil in the third quarter, though within the BFOE basket, Forties and Ekofisk remain particularly exposed to arbitrage dynamics from the North Sea to the Far East, and from the US Gulf Coast to Europe.

Q2 saw record high traffic on both routes. In May, crude exports from the North Sea to Asia skyrocketed. Every single Forties cargo loaded out of Hound Point ended up sailing east, alongside 35% of the Ekofisk exports from Teesside.

Meanwhile, imports of US crude into Europe rose to about 700,000 b/d according to trading sources’ estimates, boosted by ever-increasing US crude production and as ICE Brent futures climbed more than $10/b above the NYMEX WTI contract, its widest point since 2015.

The end of refinery maintenance season in Europe, coupled with a return of supply risks in the Middle East and North Africa, has boosted differentials across the Russian and Mediterranean crude markets as activity rolls into Q3.

Russia’s medium sour Urals differentials were on a downwards trend throughout most of late April and into the start of the May trading cycle, amid the onset of an uncharacteristically large maintenance season in Europe, and pressure from a surging Brent market.

However, Trump’s decision to withdraw from the Iran nuclear agreement in early May saw end-users in Europe scrambling to cover the potential loss of Iranian volume, boosting the sour crude complex across the region.

Also providing a floor for Urals prices have been small monthly programs, with combined loadings out of all three ports that handle Urals shipments at 6,360,000 mt (1,532,760 b/d) in June, the smallest combined program for the crude since December 2014.

Kazakhstan’s CPC Blend crude differentials also reached six-year lows at the end of April as production continued to increase and US imports flowed into the region in ever-greater volumes, a trend that proved bearish across the sweet crude markets.

However, a suspension in loadings across the eastern half of Libya in late June — exports had been stable for the better part of the year — saw differentials tick higher across the sweet crude complex, with distillate-rich Azeri Light and Siberian Light edging higher throughout much of the second-half of June. Depending on the length and severity of Libya’s crude outage, this bullish tone could carry forward across the rest of the complex.

Spot prices of Russian domestic crude had been relentlessly climbing over the course of the second quarter, pushed higher by firmer Brent values and, in an unusual pattern, by the weakening ruble.

But the impact of the higher crude prices on refinery economics was somewhat offset by firm international and domestic product prices and hence throughput levels, despite the spring turnarounds, were fairly strong in April and May.

However, domestic product process dropped moving into June — particularly diesel and gasoline — which saw domestic Russian refinery margins drop sharply. Further changes in domestic tax legislation could add to growing uncertainty in the refining market even as the trading cycle rolls forward into the peak light products demand period.

The second quarter of 2018 saw West African differentials struggle amid lower demand in both Asia and Northwest Europe, seasonal refinery maintenance season, strong Brent prices, competition from US imports, and changes to Chinese tax law which all served to curtail any arbitrage.

Large overhangs of crude — including West Africa — were still present off the coast of China, though strong product demand throughout the summer may boost refinery run rates in the region and help to clear some of lingering volume and boost differentials for newer loading programs.

However, loading delays have continued to mount in Qua Iboe and Forcados, while Bonny Light remains in force majeure. The growing uncertainty around loading dates is likely to keep pressure on these crude differentials even as demand interest looks towards other, more reliable grades.

A recent increase in fuel oil cracks has added some tentative support for sweeter, heavier crudes from Angola and Republic of Congo, a trend which could continue if fuel oil prices continue to hold.

Finally, geopolitical tensions between China and the US regarding trade tariffs on oil may offer West African crudes more opportunities in China, as US crudes fall out of favor. The narrowing spread between the US WTI and Brent markets and the strength in US crude premiums are also elements that could limit the competitive edge of US crudes over West African crudes in the east.

Source: Platts

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