September 7, 2022

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Softer Crack Spreads Drag on North Sea Trade

  • October North Sea crude exports are up 30% on the month to 775,000 b/d, which is 58,000 b/d lower on September 2021.
  • Crude supply is not an issue right now, but the relative weakness in product margins is sending the wrong signals to refiners.
  • The Brent price structure has deflated and is supportive of demand, but high volatility partly discourages forward hedging despite the looming EU embargo.

    North Sea trade has slowed in response to lower refining spot demand. The late softening in European refining margins is coinciding with seasonal downstream turnarounds, but it comes at a bad time. With middle distillate stocks still below winter requirements, weaker crack spreads send the wrong supply signal.

    The product market remains extremely tight and is largely distorted by unabated Russian product flows. But when the EU oil embargo kicks in this winter and all Russian flows to Europe cease, the potential price rally could become extraordinary.

    Ample Supply?

    The crude volumes underlying the dated Brent spot price have rebounded in October, signaling the end of planned summer maintenance and upgrading work in the North Sea.

    The five grades that make up the dated Brent pricing basket — Brent, Forties, Oseberg, Ekofisk, and Troll (BFOET) — will load an average 775,000 barrels per day in October, up nearly 30% b/d from 600,000 b/d in September.

    As refiners head into maintenance, feedstock supply is not an issue. Prompt demand is abating, partly explaining the dip in physical differentials. Forties, which often sets the price of dated Brent, is trading flat to dated Brent after having reached a fever-pitch premium of $4.5 per barrel in late July.

    But the lull may be temporary. Russian oil flows have remained largely uninterrupted, and this resilient supply continues to underpin global prices, including North Sea differentials. The current softness belies future product shortfalls. Diesel inventories are still way too low to meet the seasonal winter demand increase and extra demand from fuel switching.

    North Sea Loadings for October and September 2022
    (million bbl) OctSep
    NorwayStandard CargoNo.Vol.No.Vol.
    Ekofisk600148.4116.6
    Oseberg60053.021.2
    Troll60084.853.0
    UK
    Brent60021.210.6
    Forties600116.6115.4
    Total----24.0--16.8
    Total ('000 b/d)----775--600

    Margin Weakness

    The end of the driving season in Europe is weighing on gasoline margins and imparting some weakness to the petroleum product complex. Gasoline benchmarks are under pressure, with the spread between Brent and gasoline falling from $16/bbl to $10/bbl, brokers said.

    Forward gasoline contracts for October 2022 even dipped into negative territory, which, in theory, should stimulate demand. But the weakness is spreading. A large selloff in gasoil cracks is dragging down jet fuel prices.

    “The liquidity remains incredibly thin in middle distillates. Gappy markets and large bid offer spreads discouraged participation, with the moves showing a clear dislocation from the physical market," said Ehsan Massah, head of research at Onyx Advisory.

    If crude balances are slack, product fundamentals remain razor thin. Any price disconnect ahead of potential winter shortages is hence worrying as the prompt spreads should in principle reflect the physical market for products. “As we approach the winter months and live through the reality of the energy crisis, the last thing we need is discouraging margin levels for the refiners," Massah said.

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

    Deflating Structure

    Despite relatively steady volumes, Brent open interest has been declining since March 2021, showing that fewer investors want to hold an overnight position in a market that is prone to wild daily price swings.

    Volatility has shooed away some market participants who used to keep positions opened for more than a single day — typically the refinery hedgers. In the US, the CBOE oil volatility index (OVX) hovers around 50%. For comparison, its 10-year average is 37.6%. In the Brent options market, implied volatility is close to 50%.

    The Brent prompt premium to deliveries in six months coming off from a monthly average of $13.3/bbl in July to $5.90/bbl in August. The spot dated Brent price has sunk below the front-month future price for the first time since April, after blowing out to an $11/bbl in July.

    Intraday ebbs and flows dragged Brent below its 200-day moving average, a key support level around which the benchmark has since been hovering.

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    North Sea Loading Program for October 2022
    Loading(bbl)(b/d)ParcelEquity
    Brent
    11-13600,00019,355B1001Glencore
    21-23600,00019,355B1002Repsol
    Forties
    02-04600,00019,355F1001Repsol
    05-07600,00019,355F1002BP
    08-10600,00019,355F1003Shell
    10-12600,00019,355F1004CNOOC
    13-15600,00019,355F1005Suncor
    15-17600,00019,355F1006Eni
    18-20600,00019,355F1007Shell
    21-23600,00019,355F1008BP
    23-25600,00019,355F1009CNOOC
    26-28600,00019,355F1010Shell
    29-31600,00019,355F1011Suncor
    Oseberg
    30-02600,00019,35520221001Equinor
    06-08600,00019,35520221002Equinor
    13-15600,00019,35520221003Total
    20-22600,00019,35520221004ConocoPhillips/Equinor/Lime/Mvest
    27-29600,00019,35520221005Equinor
    Ekofisk
    30-02600,00019,355C13027Total
    03-05600,00019,355C13035Spirit Energy
    05-07600,00019,355C13026Shell
    07-09600,00019,355C13030BP
    09-11600,00019,355C13021ConocoPhillips
    12-14600,00019,355C13033Equinor
    14-16600,00019,355C13031BP
    17-19600,00019,355C13037Eni
    19-21600,00019,355C13022ConocoPhillips
    21-23600,00019,355C13036Eni
    24-26600,00019,355C13032BP
    26-28600,00019,355C13025Shell
    28-30600,00019,355C13029Total
    30-01600,00019,355C13023ConocoPhillips
    Troll
    01-03600,00019,35520221001Equinor
    05-07600,00019,35520221002Neptune
    09-11600,00019,35520221003Equinor
    14-16600,00019,35520221004PGING
    18-20600,00019,35520221005Equinor
    22-24600,00019,35520221006Sval Energi/Wintershall
    26-28600,00019,35520221007ConocoPhillips/Equinor/Idemitsu
    30-01600,00019,35520221008Equinor
    Johan Sverdrup
    01-03700,00022,58120221030Equinor
    02-04600,00019,35520221031Equinor
    03-05600,00019,35520221032Equinor
    04-06700,00022,58120221033Lundin
    06-08700,00022,58120221034Equinor
    07-09600,00019,35520221035Equinor
    08-10700,00022,58120221036Total
    09-11700,00022,58120221037AkerBP
    11-13600,00019,35520221038Equinor
    12-14700,00022,58120221039Equinor
    13-151,000,00032,25820221040Lundin
    15-17600,00019,35520221041Equinor
    16-18600,00019,35520221042Equinor
    17-19700,00022,58120221043AkerBP
    19-21700,00022,58120221044Equinor
    20-22600,00019,35520221045Equinor
    21-23600,00019,35520221046Equinor
    22-241,000,00032,25820221047Lundin
    24-26700,00022,58120221048Equinor
    25-27600,00019,35520221049Equinor
    26-28700,00022,58120221050Total
    28-30700,00022,58120221051Lundin
    29-31600,00019,35520221052Equinor
    30-01700,00022,58120221053Equinor
    Total BFOET*24,000,000774,19440 cargoes--
    Total Johan Sverdrup16,400,000529,03224 cargoes--
    Total BFOET Plus Johan Sverdrup39,800,0001,283,87164 cargoes--

    Julien Mathonniere, London