Demand supports North Sea crude differentials, WAF, Med grades struggle

North Sea crude differentials have been supported by continued demand from European refineries, while West African and Mediterranean grade differentials have come under further pressure.

S&P Global Platts assessed the Dated Brent differential at 96 cents/b Aug. 3, up 2 cents/b day on day, and the highest value since July 12.
The differential averaged 95 cents/b through July, compared to 11 cents/b through June, demonstrating the recent support for Dated Brent basket grade differentials.

North Sea grades have seen good demand levels over recent weeks as the backwardated market structure led many refineries to look towards local grades.

Traders said that despite falling values for the longer-haul grades, such as those from West Africa and the US, once the differentials had taken the backwardation into account, they did not look particularly competitive still.

Backwardation hits WAF demand

There was more West African crude pointed toward Europe because of poor arbitrage economics to Asia.

With Europe — the natural clearing house for Nigerian crude — well supplied locally, differentials were still discounted to Dated Brent, traders said.

Nigerian flagship grade Bonny Light was last assessed at Dated Brent minus 70 cents/b Aug. 3, down from a small premium at the start of July and its lowest level since May 25.

That pressure came despite improved refinery margins in Europe and a hot market for gasoline.

“Things are much better on refinery margins. [Local product] demand is good, we have nothing to complain about,” said one European refiner.

“But on the differentials, you have to include the Dated [Brent] rolls,” the source added, referring to the punitive effect of steep Brent backwardation on long-haul barrels.

Med demand woes

European Mediterranean grades also remained under pressure as traders pointed to lackluster demand despite stronger refinery margins.

“I am not seeing the demand from refineries like expected — I want to say it’s a case of Dated Brent backwardation continuing to put them off, but we have not seen much interest to buy, it’s still very much a buyers’ market right now,” a Mediterranean crude trader said.

Azerbaijan’s Azeri Light, a grade highly favored by European refiners, has seen lower interest in recent weeks with a few August-loading cargoes heard to still be looking for homes.

Azeri Light CIF Augusta was assessed at Dated Brent plus 50 cents/b Aug. 3, its lowest assessment since May 19 when it was assessed at Dated Brent plus 35 cents/b.

“I think Azeri is bearish, the market has been very quiet and end-users not buying,” said a second trader.

North Sea demand bullishness

Looking forward, North Sea differentials are expected to remain supported as traders anticipate product strength in Europe to be reflected.

“We see margins improving along with tighter products stocks — yet to see this reflected in the physical market, feels like only a matter of time,” a North Sea trader said.

With European refineries expected to increase runs amid sustained support in the products markets, traders anticipated that North Sea grades will be the ‘go-to’ choice to cover the extra requirements given its proximity.
Source: Platts