August 4, 2022

WWW.ENERGYINTEL.COM

Undersupplied Sweet Market Boosts North Sea Crude

  • September North Sea crude exports are down a whopping 18% on the month, to 600,000 b/d, and 120,000 b/d lower than September 2021.

  • Demand for incremental barrels in Europe is focusing on light, sweet crude to minimize processing costs and maximize shipping fuel yields.
  • The market tightness and resulting disconnect between the physical price and the future price has dramatically increased basis risk for buyers.

The North Sea crude trade is thriving on regional demand for spot oil and the high profitability of very low-sulfur fuel oil (VLSFO). Refiners buy this short-haul and low-sulfur North Sea crude to save on processing costs, mitigate price backwardation, and bolster protection against the price disconnect between physical and future prices. Processing costs have gone up fast after fresh spikes in the natural gas price have increased the cost of hydrogen, a workhorse of desulfurization and secondary conversion for refiners. Low-sulfur North Sea grades minimize costly treatment and produce lots of VLSFO.

Tight Supply

The five grades that make up the dated Brent pricing basket — Brent, Forties, Oseberg, Ekofisk and Troll (BFOET) — will load an average 600,000 barrels per day in September, down 18% from 735,000 b/d from August. This lower availability of North Sea crude further tightens the light, sweet market, which is already undersupplied in Europe. The strength of the dated Brent spot price, which has been consistently above future prices since May, reflects the current tightness.

“Strong demand for incremental runs and simple refineries have created a big demand for sweet crude, which is undersupplied, particularly in Europe because of the outages from Libya,” Saras CEO Dario Scaffardi said. Recurrent supply disruptions in Libya already contributed to the rally in regional sweet crude, although Libyan officials said the nation’s oil production is returning to regular levels after some disputes were settled. In West Africa, the Bonny Light stream is under force majeure and other streams have been plagued by theft and technical issues.

North Sea Loadings for September and August 2022
(million bbl) SepAug
NorwayStandard CargoNo.Vol.No.Vol.
Ekofisk600116.6169.6
Oseberg60021.242.4
Troll60053.074.2
UK
Brent60010.621.2
Forties600115.495.4
Total----16.8--22.8
Total ('000 b/d)----735--735

Sweet Fever

European refiners are running more sweet oil to crude to minimize their desulfurization costs — because of high hydrogen prices — and maximize yields of high-margin, low-sulfur shipping fuel. This preference has a material effect on sweet crude prices, which is being bid more aggressively than sour crude.

Crudes like Azeri Light, a potential competitor to some North Sea grades, have flared up to double-digits premiums, which is unprecedented for a grade whose historic average spot premium is $2 per barrel to dated Brent. Some buyers have tried to move away from this grade and buy North Sea crude instead.

This prompt strength has suffused the Brent complex with bullishness and started to strain the profitability of the lighter end of the barrel. Too much naphtha and gasoline come out of European refinery runs, reflecting the typical yields of light, sweet crude.

Refiners are faced with an insoluble conundrum: saving on energy costs by running sweet oil, or running more energy-intensive sour crude that takes longer to ship with Russian supply increasingly out of the picture.

Created with Highcharts 9.0.0('000 b/d)NORTH SEA LOADINGS: DATED BRENT BENCHMARK STREAMSFortiesEkofiskTrollOsebergBrentSep'22Aug'22Jul'22Jun'22May'22Apr'22Mar'22Feb'22Jan'22Dec'21Nov'21Oct'21Sep'2102505007501,000Source: Energy IntelligenceSep'21 Troll: 120

Basis Risk

The spread between Brent futures and the dated Brent price — known as the dated-to-frontline swap — blew out to a record $11/bbl in mid-July, and is still standing at about $6/bbl. The large price differential is posing acute hedging problems to buyers of Brent-linked barrels. Refiners usually benchmark their crude purchases against the dated Brent spot price, but all instruments to hedge are generally based on future prices, creating large potential for a mismatch in the hedged position.

As the disconnect between physical and future prices widen, so does the portion of physical purchases unlikely to be fully covered by the chosen hedge. “So, the basis risk has been difficult to manage for all,” Scaffardi said, adding that the Brent market is “a little bit more normalized” now compared with the previous months.

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North Sea Loading Program for September 2022
Loading(bbl)(b/d)ParcelEquity
Brent
17-19600,00020,000B0901TotalEnergies
Forties
03-05600,00020,000F0901CNOOC
06-08600,00020,000F0902Shell
09-11600,00020,000F0903Suncor
11-13600,00020,000F0904BP
14-16600,00020,000F0905TotalEnergies
16-18600,00020,000F0906Shell
19-21600,00020,000F0907Eni
22-24600,00020,000F0908CNOOC
24-26600,00020,000F0909Suncor
27-29600,00020,000F0910Shell
29-01600,00020,000F0911Glencore
Oseberg
09-11600,00020,00020220901ConocoPhillips/Equinor/Lime
19-21600,00020,00020220902Equinor
Ekofisk
05-07600,00020,000C13010Shell
07-09600,00020,000C13017TotalEnergies
09-11600,00020,000C13004BP
12-14600,00020,000C13018TotalEnergies
15-17600,00020,000C13007Equinor
17-19600,00020,000C13005BP
19-21600,00020,000C13013ConocoPhillips
22-24600,00020,000C13015Eni
25-27600,00020,000C13020TotalEnergies
27-29600,00020,000C13006BP
29-01600,00020,000C13014ConocoPhillips
Troll
09-11600,00020,00020220901Sval Energy/Wintershall
13-15600,00020,00020220902Equinor
18-20600,00020,00020220903Equinor
23-25600,00020,00020220904Var Energi
27-29600,00020,00020220905ConocoPhillips/Equinor/Idemitsu
Johan Sverdrup
31-02600,00020,00020220849Equinor
01-03650,00021,66720220851AkerBP
03-05700,00023,33320220930Lundin
04-06750,00025,00020220931TotalEnergies
06-08700,00023,33320220932Equinor
07-09650,00021,66720220933AkerBP
08-10700,00023,33320220934Equinor
10-12700,00023,33320220935Equinor
11-13700,00023,33320220936Lundin
12-14700,00023,33320220937Equinor
13-15700,00023,33320220938Equinor
15-17700,00023,33320220939Equinor
16-18700,00023,33320220940Equinor
18-201,000,00033,33320220941AkerBP
19-21700,00023,33320220942TotalEnergies
21-23700,00023,33320220943Lundin
22-24700,00023,33320220944Equinor
23-25600,00020,00020220945Equinor
24-26700,00023,33320220946Equinor
26-28700,00023,33320220947Lundin
27-29600,00020,00020220948Equinor
28-30700,00023,33320220949Equinor
29-01600,00020,00020220950Equinor
Total BFOET*18,000,000600,00030 cargoes--
Total Johan Sverdrup15,950,000531,66723 cargoes--
Total BFOET Plus Johan Sverdrup23,450,000781,66753 cargoes--

Julien Mathonniere, London