Physical, Paper Demand Converge in North Sea Trade

Copyright © 2021 Energy Intelligence Group

• September North Sea crude oil exports are poised to fall 64,000 barrels per day to 720,000 b/d, or 9.3% lower than in August. • Brent backwardation is supportive of short-haul grades and stronger gasoline margins from light, sweet feedstock -- two factors favoring North Sea oil. • Healthy time spreads show that the reflation trade is still apace with the paper market, and liquidity is holding steady. North Sea crude has regained momentum, benefiting -- in addition to a shorter export program -- from a double exposure to higher gasoline crack spreads and steady volumes of reflationary trade. Save for two days, the dated Brent price has been trading over $70 per barrel since Jul. 21, confirming that the physical price has finally caught up with the paper market. Despite a shut arbitrage to the East of Suez, North Sea light, sweet crude is enjoying a recovery in regional refining margins, especially light products like gasoline and naphtha. Also, the prospect of supply deficits has kept the forward market in firm backwardation, enticing investors to hold onto their paper positions. Stronger Margins The rebound in refined product demand has dovetailed with a seasonal uptick in road fuel consumption, especially for gasoline. Drivers frustrated by months of lockdowns and impediments to international air travel have taken to the roads in their respective countries. Gasoline margins in Northwest Europe rebounded to double-digit crack spreads in mid-July and now stand at $11.77/bbl, Energy Intelligence data show. The European gasoline market is getting hot, and this is waxing bullish on North Sea crude differentials, especially gasoline-rich grades like Norway’s Ekofisk and Oseberg. All five grades that make up the Brent -- or BFOET (Brent, Forties, Oseberg, Ekofisk, Troll) -- pricing basket are now trading at premiums of 85¢ to $1.80 to dated Brent. Stronger refiner demand has jacked up prompt prices and deepened the market backwardation. The average premium of dated Brent to the front-month ICE Brent future contract was 82¢ in July. North Sea Loadings for September 2021

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