October 10, 2022

WWW.ENERGYINTEL.COM

North Sea Trades Bullish But Price Moves Show Fragility

  • November North Sea crude exports remain relatively steady month on month, at 780,000 b/d, but are 5% below the same month last year
  • Brent future spreads are “on charge” and moving up, but traders question oil's ability to keep the momentum going, even after Opec-plus cuts
  • The North Sea market has moved from backwardation to contango and back on higher demand from refiners coming out of maintenance

The North Sea market has moved from backwardation to contango, and again to backwardation on higher demand from refiners resuming operations after their seasonal turnarounds. But traders question whether the prompt premium over later supplies — a sign of spot oil tightness — can be sustained. Anecdotal evidence from the Brent paper market points to small cracks in an otherwise bullish price structure.

Differentials Rebound

The semi-annual maintenance at several refineries in Northwest Europe kept the spot market relatively subdued in September. But the futures contract market is now trading December barrels and even the lower-quality Forties blend has rebounded from the steady discount it maintained throughout much of September, to a premium of $1.30/bbl to Dated Brent.

The five grades that make up the Dated Brent pricing basket – Brent, Forties, Oseberg, Ekofisk, and Troll (BFOET) — will load an average 780,000 b/d in November. With refinery demand coming back, spot interest is shaping up too. Brent blend itself is now fetching $4.50/bbl, while other grades are hovering between $3.50/bbl and $4.50/bbl.

The Opec-plus decision last week to cut production is only adding to the pressure on prompt demand. After only one week into December trading, the physical Dated Brent premium is back at $1 to the front-month ICE Brent December contract.

When refiners started maintenance and prompt buying dried up, the weekly Brent CFD swaps, which tie the Brent forward and Dated Brent prices, flipped into a shallow contango — a price structure where prompt prices are at a discount to later supply. They have now reshaped into a backwardation of about 92¢ for the first, front-week swap. But Dated Brent is trading only a notch above futures, suggesting that backwardation could erode quickly, despite the Opec-plus cut.

North Sea Loadings for November and October 2022
(million bbl) NovOct
NorwayStandard CargoNo.Vol.No.Vol.
Ekofisk600137.8148.4
Oseberg60042.453.0
Troll60095.484.8
UK
Brent60031.821.2
Forties600106116.6
Total----23.4--24.0
Total ('000 b/d)----780--775

US Supply Pivot

Opec-plus decided on a 2 million b/d of headline cut from November, which effectively is a 1 million b/d reduction in real production. It sends the crude market on a bumpy ride with more price volatility. Light, sweet crude from the North Sea is likely to remain a favored feedstock, because of sky-high natural gas prices and the resulting desulfurization costs.

Available North Sea volumes are limited, which attracts more sweet crude from the US to rebalance the market. In theory, this may help narrow or even close the arbitrage spread between Brent and US West Texas Intermediate. The spread was $6.25/bbl on Monday and wide enough to let US oil flow to Europe.

US crude exports are poised to break through 3.5 million b/d, with close to 1.5 million b/d of that shipping to Europe, which has overtaken Asia as the largest destination for US barrels. The oil trading community has recently accepted the inclusion of WTI in Europe's flagship Dated Brent benchmark as a way to mitigate North Sea liquidity issues. This strategic move by price reporting company S&P Global Platts seems to befit the growing US supply trend that will become a permanent feature of the European crude market.

Created with Highcharts 9.0.0('000 b/d)NORTH SEA LOADINGS: DATED BRENT BENCHMARK STREAMSFortiesEkofiskTrollOsebergBrentNov'21Dec'21Jan'22Feb'22Mar'22Apr'22May'22Jun'22Jul'22Aug'22Sep'22Oct'22Nov'2202505007501,000Source: Energy Intelligence

Unsustainable Strength?

Brent gained $10/bbl since the Opec-plus announcement — or about 11%. But the late benchmark strength also reflects the fresh buying interest in the physical market. There is good buying for the prompt CFD swaps, trading sources said.

At the same time, though, a broker said the market shows more selling at the later-dated end of the weekly CFD curve, from 24-28 October onwards, suggesting that maybe the current price rally could run out of steam faster than the market thinks.

“I personally do not think the futures rally is going to be long-lived given the cuts are not materially significant if you take into account demand, especially with the fears of recession,” Ehsan Massah, head of research at Onyx Advisory, told Energy Intelligence.

Traders think that a few drivers are missing, making it harder for Brent to price sustained above $100/bbl. “We are in a low open interest environment,” said Massah, “and this is probably going to continue because of the cost of borrowing and the volatility in the market disincentivizing participation.” Since April this year, Brent open interest has struggled to break through 800,000 positions on ICE Futures and seems to be in stasis.

omb221010_Sankey.svg

North Sea Loading Program for November 2022
Loading(bbl)(b/d)ParcelEquity
Brent
11-13600,00020,000B1101EnQuest
21-23600,00020,000B1102Glencore
28-30600,00020,000B1103EnQuest
Forties
02-04600,00020,000F1101Total
04-06600,00020,000F1102BP
07-09600,00020,000F1103Shell
10-12600,00020,000F1104Repsol
13-15600,00020,000F1105CNOOC
16-18600,00020,000F1106Shell
19-21600,00020,000F1107Suncor
21-23600,00020,000F1108BP
24-26600,00020,000F1109Eni
27-29600,00020,000F1110Shell
Oseberg
07-09600,00020,00020221101Equinor
14-16600,00020,00020221102DNO/Total
21-23600,00020,00020221103ConocoPhillips/Equinor/Lime/Mvest
28-30600,00020,00020221104Equinor
Ekofisk
02-04600,00020,000C13047BP
05-07600,00020,000C13041Total
07-09600,00020,000C13048BP
09-11600,00020,000C13045Eni
12-14600,00020,000C13042Total
14-16600,00020,000C13044Suncor
17-19600,00020,000C13049BP
19-21600,00020,000C13038ConocoPhillips
21-23600,00020,000C13046Eni
23-25600,00020,000C13043Total
25-27600,00020,000C13040Shell
27-29600,00020,000C13050BP
20-01600,00020,000C13039ConocoPhillips
Troll
31-02600,00020,00020221007ConocoPhillips/Equinor
04-06600,00020,00020221008Equinor
10-12600,00020,00020221101Equinor
13-15600,00020,00020221102Wintershall
17-19600,00020,00020221103Equinor
21-23600,00020,00020221104Neptune
24-26600,00020,00020221105ConocoPhillips/Equinor/Idemitsu/SvalEnergy
27-29600,00020,00020221106Equinor
29-01600,00020,00020221107Okea/Shell
Johan Sverdrup
01-032,000,00066,66720221130Equinor
05-072,000,00066,66720221131AkerBP
08-10600,00020,00020221132Equinor
09-11700,00023,33320221133Equinor
10-12600,00020,00020221134Lundin
12-14600,00020,00020221135Equinor
13-15600,00020,00020221136Equinor
14-16700,00023,33320221137Equinor
15-17600,00020,00020221138Lundin
16-18600,00020,00020221139Equinor
17-191,000,00033,33320221140Total
19-21600,00020,00020221141Equinor
20-22700,00023,33320221142Equinor
21-23600,00020,00020221143AkerBP/Lundin
22-24600,00020,00020221144Equinor
23-25600,00020,00020221145Equinor
24-26700,00023,33320221146Equinor
25-27600,00020,00020221147Equinor
26-282,000,00066,66720221148Lundin
29-01600,00020,00020221149Equinor
Total BFOET*22,200,000740,00039 cargoes--
Total Johan Sverdrup17,000,000566,66720 cargoes--
Total BFOET Plus Johan Sverdrup30,000,0001,000,00059 cargoes--

Julien Mathonniere, London