Crude Oil Markets: Sweet Grades Ride Wave of High Gasoline Margins

The prospect of a supply deficit in the remainder of 2021 has kept the forward markets for oil products in backwardation across most regions and supported a healthy demand for spot purchases of crude in July (OMI Jun.16'21). Yet physical differentials are exhibiting various levels of strength, depending on crude quality and location. With gasoline taking center stage in the margin recovery, sweet crudes that yield more lighter fractions are favored over heavier, sour alternatives (related). Given the backwardation, refiners have reduced crude stocks to avoid large impairments on inventories, which depreciate in value over time in this price structure, where prompt oil is at a premium over later supplies. Refiners prefer short-haul crude over long-haul to take advantage of flexibility and avoid the additional cost of hedging a cargo whose value is bound to decrease during its journey, especially if it takes several weeks (OMI Jul.19'21). North Sea crude has hence benefited from higher gasoline cracks spreads and its proximity to the main Northwest Europe refining hub. Elsewhere, sweet crude may still struggle to find its way to the market. In West Africa, cargo deferrals from July into August make it harder for the export program from Angola and Nigeria to clear (OM Briefing Jul.23'21). Delivery snags in these countries make the crude harder to sell, even though they are sweet. And there is no rush, as sweet markets are less tight, with the Brent backwardation narrowing. Also, relatively cheap Libyan official selling prices are adding pressure in the Mediterranean. Even normally expensive sweet grades like Azeri Light are slow to clear despite a record-thin premium of about 50¢ per barrel. Since gasoline is king, Azeri Light yields too many middle distillates to command the huge premiums it used to pre-pandemic. Likewise, Urals suffers from the lagging recovery in gasoil and jet margins in Europe. Russia’s flagship export blend is also languishing from the shut arbitrage to East of Suez, which remains the main impediment. At a sticky $4/bbl, the Brent-Dubai Exchange of Futures for Swaps spread between Brent futures and the Dubai cash market is well above its historical $2.70-3.00/bbl average, which makes Brent-linked grades like Urals less competitive than Middle East crude priced off Dubai in Asia. Urals flows to Asia in July have dropped to their lowest in four months. The spot market for Russia’s key East Siberia-Pacific Ocean (Espo) blend also weakened after China planned the release of 23 million to 29 million barrels of sour crude from its strategic petroleum reserve, staving off the Espo market from its main buyer (related). Like their European peers, Asian refiners prefer to buy lighter, gasoline-rich grades from the Middle East such as the United Arab Emirates' sweet Murban crude, whose differentials have flared up in response to higher demand. Given the wide Brent-Dubai spread, the recent collapse in the front-end Brent structure was probably unavoidable if only to help supply clear to the East. But the market also needs China and some other large Asian and Asia-Pacific countries like Australia, Indonesia and Pakistan to rein in the Delta Covid-19 variant and reboot domestic product demand. This in turn will help refiners return to the spot market and clear whatever is left in West Africa, Iraq or Russia. Buyers are also holding out as long they can, waiting for a discount. FORWARD & FUTURES Nymex Crude Futures Jun Jul Aug US WTI 71.35 72.52 68.89 2nd Month -0.37 -0.68 -0.31 3rd Month -1.07 -1.57 -0.74 4th Month -1.84 -2.44 -1.23 Brent 30-Day UK Dated Brent 73.15 75.17 71.67 UK Forward Brent 73.51 74.40 71.19 2nd Month -0.61 -0.79 -0.49 3rd Month -1.30 -1.55 -1.03 4th Month -1.93 -2.30 -1.53 ICE Futures UK B-wave 73.32 74.15 71.08 UK Brent Futures 73.41 74.29 71.07 2nd Month -0.59 -0.79 -0.47 3rd Month -1.29 -1.55 -0.99 4th Month -1.92 -2.29 -1.50 Murban Futures 72.35 73.51 70.24 2nd Month -0.71 -1.12 -1.02 3rd Month -1.57 -2.10 -1.82 4th Month -2.21 -2.84 -2.14 Forward Dubai Dubai Fateh 71.57 72.91 70.57 2nd Month -1.01 -1.31 -1.47 3rd Month -1.85 -2.39 -2.30 Brent Premium over Dubai Dated Brent vs Dubai +3.63 +3.96 +3.47 KEY CRUDE OIL BENCHMARKS, SPREADS, SPOT & TERM PRICES ($/bbl) SPOT ASSESSMENTS Benchmarks May Jun Jul Opec Basket 66.91 71.89 73.52 BFOE Dated (a) 68.49 73.15 75.17 UK Brent 69.42 73.29 76.06 Forties 69.43 73.43 76.14 Norway Ekofisk 69.61 73.73 76.26 Oseberg 69.66 73.84 76.33 Russia Urals (NWE) (b) 66.69 71.59 72.50 Oman 64.85 70.47 73.72 Dubai Fateh 66.31 71.57 72.91 US Gulf WTI (Cushing) (b) 65.17 71.38 72.49 W. Texas Sour 65.51 71.29 72.27 Mars 65.21 70.57 70.51 Lt. Lousiana Sweet 67.22 72.90 73.06 US Midcon Bakken 65.00 70.86 72.63 US West ANS 66.86 73.60 74.98 Crude spreads WTI-Brent (c) -3.32 -1.77 -2.68 Brent-LLS +1.27 +0.25 +2.10 Brent-Dubai +2.18 +1.58 +2.26 Murban-ESPO -1.63 -3.40 -3.77 Brent CFD +0.19 -0.36 +0.76 Crack spreads d Nymex 3-2-1 Crack(d) +22.67 +20.12 +20.55 Nymex 5-3-2 Crack(e) +22.37 +19.88 +20.20 Nymex 2-1-1 Crack(f) +21.92 +19.53 +19.66 NWE 3-2-1 Crack(d) +6.75 +6.20 +7.11 NWE Gasoline Crack(g) +8.06 +7.12 +9.01 NWE Gasoil Crack(g) +4.14 +4.35 +3.32 Asia May Jun Jul Malaysia Tapis 71.80 73.50 75.68 Viet Nam Bach Ho 71.53 75.91 78.33 Russia ESPO 68.87 74.54 75.64 Mideast Abu Dhabi Murban 67.24 71.14 71.87 Qatar Marine 67.36 71.76 74.48 Mediterranean Algeria Saharan 67.93 72.46 75.36 Azerbaijan Azeri 68.95 74.71 76.28 Kazakhstan CPC Blend 66.16 71.40 72.88 Russia Urals 66.88 71.33 72.51 Africa Angola Cabinda 68.52 73.70 75.79 Girassol 68.50 73.66 75.50 (a)UK Brent dated price for physical supplies loading within 25 days.