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Oil quarterly: Heavy crudes strengthen amid sanctions, production cuts

The rollout of the International Marine Organization’s switch towards lower sulfur marine fuels in 2020 has dominated the conversation in both the crude and refined product markets throughout the first quarter of the year and will continue to do so moving forward.

Early 2019 was defined by a sharp narrowing of the spreads between lighter, sweet crudes and heavier, more sour ones. This was evident in the Brent-Dubai Exchange Futures for Swaps market, which dropped to multi-year lows in late-February.
This was felt most sharply in Europe through the Urals market, which saw differentials for cargoes on both a CIF Rotterdam and CIF Augusta basis soaring sharply above Dated Brent.

Globally, the sour crude market tightened further in the first three months of the year, due to a combination of OPEC production cuts and the reduction of Iranian and Venezuelan crude exports as a result of sanctions.

Against this background, Urals differentials in both Northwest Europe and the Mediterranean priced at a premium to Dated Brent for much of January and February. While there was a brief respite from the bullish trend in early March amid strengthening backwardation in Dated Brent, Urals finished the quarter on fresh highs amid renewed arbitrage demand from Asia.

Global stocks of heavier crudes are expected to continue to drive demand for Urals, particularly ahead of the onset of IMO 2020, with strong differentials for heavy barrels expected to carry through into the second quarter as fuel oil cracks remain supported ahead of the global switch towards marine distillates.

Similarly, the heavy sweet Angolan market also saw strong demand from both Asian and US buyers push differentials to heavy premiums to Dated Brent, particularly throughout the March trading cycle, following the onset of fresh US sanctions against Venezuela.

Both Dalia and Pazflor saw levels climb above those fetched for lighter, sweeter crudes like Cabinda in the S&P Global Platts Market on Close assessment process, bolstered by firm fuel oil crack spreads and OPEC production cuts.

Dalia, in particular, sold out both the March and April loading programs in under a week at triple-digit premiums to Dated Brent. Similarly, Chad’s heavy, sweet but slightly more acidic Doba crude strengthened steadily throughout the quarter before moving to a premium to Dated Brent in mid-March.

Market expectations for Angolan crude are bullish, with demand set to remain steady from both China and the US. Heavy, sweet crudes are particularly attractive to the refiners that can afford to pay up for them, particularly ahead of the changing marine fuel specification due to take effect at the start of next year.

RETURN OF ASIAN DEMAND FOR NORTH SEA

The first quarter of 2019 was quiet in the North Sea market, with most of the volatility concentrated in Urals crude.

Little-to-no arbitrage demand for North Sea crude from the Far East — coupled with an uncharacteristically weak light ends complex — served to keep differentials pricing at discounts to Dated Brent.

Simultaneously, structure in the Brent contract for differences (CFDs) derivatives market oscillated between a moderate contango and a mild backwardation.

However, the April trading cycle saw a surge in demand for the grades that make up the basket of crudes in Dated Brent, with both differentials and backwardation rising sharply throughout March. Traders said that the source of support was an increase in demand from the Far East, and several VLCC fixtures were reported for April-loading dates.

Moving into the second quarter of 2019, the main focus for the North Sea crude market is the likely export arbitrage from Europe towards the Far East and the relative balance between import arbitrage from the US.

Throughout March, some 800,000 b/d of US crude was due to land in Europe, the vast majority of which was bound for Northwest Europe. However, April is likely to see comparatively fewer imports as demand for US crude from the Far East is set to supplant demand for volumes from Europe.

Many traders have emphasized that Chinese demand for European crudes will be a big swing factor for the strength of the North Sea crude market moving into Q2.

While most of February and March saw subdued trading cycle, a surge in buying interest across the Brent, Forties, Oseberg and Ekofisk grades — which are used to determine the daily Platts Dated Brent assessment — was seen in the last decade of March. This demand is expected by many to continue into the first part of April onwards, as the region?s refinery turnaround season comes to an end.

WEAK GASOLINE, NAPHTHA PRESSURE SWEET CRUDES

Throughout the first quarter, historically weak naphtha and gasoline cracks saw demand for lighter, sweet crudes plummet across Europe, even as growing exports of US crudes boosted availability.

Nigerian gasoline- and naphtha-rich crude grades in particular saw low buying interest as a result of weak refinery margins in addition to competition from heavy exports of competing US crudes of similar quality.

In Europe, both CPC Blend and Algeria’s Saharan Blend have seen levels stay subdued, with lengthy delays through the Turkish straits during the winter also constraining both Mediterranean and Asian demand for CPC.

The one bullish factor in the region has been the three-month force majeure on Libya’s El Sharara. But with Sharara now back since mid-March and arbitrage continually open for US crudes to price into Europe, bearish pricing expectations on light Mediterranean grades remain the status quo.

By contrast, more distillate-rich grades benefited from seasonal strength in gasoil and diesel, which helped to support differentials.

Azerbaijan’s Azeri Light has benefited from strong winter margins and increased demand as refineries switch slates to more middle distillate-rich grades ahead of the IMO 2020 regulations. Similarly, distillate-rich West African grades like Bonga and Forcados saw better support in the early half of Q1 as refiners tried to maximize distillates production.

However, moving into Q2, differentials for all light sweet crudes could come under renewed downward pressure on strong global supply, particularly from the US.

RUSSIAN CRUDES REACT TO STRONGER BRENT PRICES

Spot prices of Russian crude for domestic loading and delivery in the first three months of the year have been on the rise, tracking Brent futures and against a backdrop of lower export duties.

Prices of crude to be processed by Russian refineries firmed to levels in excess of Rb27,000/mt ($421.90/mt) at the end of the quarter from around Rb21,200/mt in January.

While firming Brent has been the main factor, domestic crude prices have alsostrengthened as a result of Russia lowering its export duty with the aim of completely abolishing it in 2024. The lower export duty pushes up the export netback, which Russian traders use as a gage.

Source: Platts

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