EU Ban Kicks North Sea Trade Back to Life
- July North Sea crude exports regain over 43% on the month to 774,000 barrels per day, with the gasoline-packed Ekofisk stream now back on line.
- European demand is crowding out shipments to Asia as more buyers in the region are vying for the same light, sweet barrels and showing a preference for short-haul crude given the current backwardation and price volatility.
As a result, wide premiums have returned to the physical market, responding in large part to hefty refining margins and product cracks, but also to a new wave of speculative interest in the paper market.
After a dip in June due to maintenance, the Brent, Forties, Oseberg, Ekofisk and Troll (BFOET) loadings that comprise the Brent pricing complex are back to normal — that is to say, roughly in line with year-ago levels, or an average 774,000 b/d for July.
Crucially, more volumes are remaining in Europe to address the supply shortages stemming from the recent EU ban on Russian oil. Less Forties, a potential substitute for Russia’s Urals crude, is getting shipped to Asia and instead is scooped up by countries such as Italy, Germany, Lithuania or Poland.
After bottoming out in late April, physical differentials have been rising. Brent rebounded from a discount of more than $1 to dated Brent to a $3.25 per barrel premium. Likewise, Forties is now trading close to $2.50/bbl, up from a 35¢ discount to dated Brent.
With the driving season in the Northern Hemisphere now in full force, a gasoline-rich grade like Ekofisk can command a premium of $5.6/bbl. Middle distillate-rich Oseberg, an ideal feedstock for addressing the current diesel and jet fuel shortage in Europe, is even higher at $5.75/bbl.
|North Sea Loadings for July and June 2022|
|Total ('000 b/d)||--||--||774||--||540|
|Source: Energy Intelligence|
The spot market welcomed the new August trading cycle with a spike in time spreads. The Brent prompt premium flared up to a whopping $7.24 per barrel on May 31 as traders rolled their exposure to the new front-month when the ICE Brent July contract expired.
The spike denotes two distinct phenomena. First, it partly reflects the fact that more traders carry out roll trades (as opposed to outright trades) to limit the cost of their margin calls. This means more trades are being rolled at contract expiry, leading to potential price spikes.
Second, the time spreads widened in anticipation of a bull play in the paper market, one broker told Energy Intelligence.
This approach effectively reached a climax when a front-month future contract expired as counterparties selling the front roll may have tried to squeeze the short-sellers and force them to repurchase the positions they had previously borrowed at a higher price.
Meanwhile, speculative interest has also returned to the paper market. Net managed money positions in Brent have increased for three consecutive weeks and gained nearly 50 million barrels to 210 million bbl.
Refining margins have hit a fresh multiyear high, pointing to continued product tightness — not only diesel and jet fuel, but now gasoline. Refining Brent in Europe yields a profit of more than $27/bbl, according to Energy Intelligence data, which is supporting spot cargo purchases in a fundamentally undersupplied product market.
The weekly Brent CFD swaps, which tie the Brent forward and future markets together, have reshaped into a steep backwardated structure, signaling a renewed appetite for prompt barrels. The front-week CFD swap is trading at a steep $5.25/bbl, lifting the dated Brent price well above the front-month future price, which was already straying north of $120/bbl.
|North Sea Loading Program for July 2022|
|Total BFOET*||24,000,000||774,194||40 cargoes||--|
|Total Johan Sverdrup||12,800,000||412,903||18 cargoes||--|
|Total BFOET Plus Johan Sverdrup||29,000,000||935,484||58 cargoes||--|
|*BFOET stands for the five North Sea benchmark streams: Brent Forties, Oseberg, Ekofisk and Troll. Source: Energy Intelligence|