December 14, 2022

WWW.ENERGYINTEL.COM

North Sea Trade Stuck in a Rut

  • Brent, Forties, Oseberg, Ekofisk and Troll (BFOET) crude exports are down 2.7% month on month at 716,000 barrels per day.
  • Johan Sverdrup has broken through 700,000 b/d and is helping mitigate the Russian supply shortfall.
  • The Brent forward structure shows the market’s lack of prompt appetite for sweet crude and unjustifiably lofty spot prices.

The G7 price cap on Russian oil has trimmed enthusiasm in the Brent paper market, while the North Sea physical market is getting hammered by a surplus of sweet crude in the Atlantic Basin.

Differentials have tanked and spreads flipped into contango, but dated Brent, the price of a physical barrel, is still too high to clear an overhang of spot cargoes. There is a silver lining to the cloudy regional supply picture though: by breaking through 700,000 b/d, Johan Sverdrup exports are compensating part of diminished Russian supplies.

Sverdrup Breakthrough

Crude supply from Norway’s most prolific stream has reached 703,000 b/d, gaining an additional 140,000 b/d in only two months. Sverdrup is now meeting Baltic crude demand, owing to its proximity and its medium-sour, diesel-rich properties that make a perfect replacement for sanctioned Russian volumes.

Equinor is targeting 755,000 b/d of production as part of the field’s Phase 2 development launched this month. Recent export data suggest that Norway’s production could rise by 15% in 2023, backed by a supportive government budget. Norway is already Europe’s largest natural gas supplier since Russia slashed its exports.

Sverdrup was among the potential incumbents for boosting dated Brent's liquidity and rekindling the battered benchmark, but the market has instead favored the inclusion of West Texas Intermediate, mainly because it is a light, sweet crude like the other streams of the BFOET pricing basket.

North Sea Loadings for January 2023 and December 2022
(million bbl) Dec '22Jan '23
NorwayStandard CargoNo.Vol.No.Vol.
Ekofisk600--7.8137.8
Oseberg600--2.431.8
Troll600--4.284.8
UK
Brent600--1.231.8
Forties600--6.6116.6
Total----22.2--22.8
Total ('000 b/d)----716--736

Collapsing Structure

The Brent complex, however, is not doing so well. Both physical differentials and Brent future spreads have come off. The front of the forward curve has flipped into contango, usually the sign of a lack of prompt buying and resulting supply glut.

Specifically, the Brent prompt February 2023 contract is now trading at a discount of 39¢ over delivery in March after a plunge to negative $1.54 during the last Brent future expiry on Nov. 30.

The spot prices of non-BFOET crudes have come off substantially to incentivize buying. Still, traders think that benchmark grades remain too high to help the spot market to clear.

“I think dated Brent structure also needs to come off to help clear the glut. Forties differentials are simply too high," a European trader said. Forties was still trading at a premium of $1.20 per barrel to dated Brent as of writing this report.

Created with Highcharts 9.0.0('000 b/d)NORTH SEA LOADINGS: DATED BRENT BENCHMARK STREAMSFortiesEkofiskTrollOsebergBrentJan'23Dec'22Nov'22Oct'22Sep'22Aug'22Jul'22Jun'22May'22Apr'22Mar'22Feb'22Jan'2202004006008001,000Source: Energy Intelligence

Freight Explosion

The problem is that the EU and G7 have created mass confusion in the physical market, prompting a surge in freight rates. Part of that is justified by the lack of available tonnage after the sanctions-triggered reshuffle of global crude flows. But part is also linked to the higher cost of doing business amid pervasive market uncertainty.

Cargoes bought on a c.i.f. basis help traders mitigate that uncertainty by pricing their cargoes at the time of striking the deal as opposed to the time of loading, which is usually when crude is priced and can be several weeks later.

“With freight so expensive, buying North Sea c.i.f. delivered is a great idea. F.o.b. barrels like BFOET are simply too expensive," the trader said.

Given the wild fluctuations in freight, less buyers are willing to take the risk of fixing a tanker several weeks after the deal is done, which also explains the pervasive Brent weakness.


omb221213_Sankey.svg

North Sea Loading Program for December 2022
Loading(bbl)(b/d)ParcelEquity
Brent
11-13600,00019,355B0101EnQuest
19-21600,00019,355B0102Shell
Forties
01-03600,00019,355F0101CNOOC
04-06600,00019,355F0102BP
07-09600,00019,355F0103Eni
09-11600,00019,355F0104Shell
12-14600,00019,355F0105Total
15-17600,00019,355F0106CNOOC
17-19600,00019,355F0107BP
20-22600,00019,355F0108Shell
23-25600,00019,355F0109Suncor
26-28600,00019,355F0110Shell
28-30600,00019,355F0111BP
Oseberg
06-08600,00019,35520230101Total
14-16600,00019,35520230102Equinor
22-24600,00019,35520230103ConocoPhillips/DNO/Equinor
30-01600,00019,35520230104Wintershall
Ekofisk
01-03600,00019,355C13074Total
04-06600,00019,355C13068Shell
07-09600,00019,355C13071BP
09-11600,00019,355C13080Eni
11-13600,00019,355C13075Total
14-16600,00019,355C13079Equinor
17-19600,00019,355C13069Shell
19-21600,00019,355C13077ConocoPhillips
21-23600,00019,355C13076Total
24-26600,00019,355C13082Eni
26-28600,00019,355C13070Shell
28-30600,00019,355C13072BP
30-01600,00019,355C13078ConocoPhillips
Troll
04-06600,00019,35520230101 Equinor
08-10600,00019,35520230102Wintershall
12-14600,00019,35520230103Equinor
16-18600,00019,35520230104 Equinor
19-21600,00019,35520230105ConocoPhillips/Equinor
26-28600,00019,35520230106Equinor
29-31600,00019,35520230107Idemitsu/PGNiG
Johan Sverdrup
31-02700,00022,58120230130ABP
01-03700,00022,58120230131Equinor
02-04700,00022,58120230132Equinor
03-05700,00022,58120230133Equinor
04-06700,00022,58120230134ABP
05-07700,00022,58120230135Equinor
06-08700,00022,58120230136Equinor
07-09700,00022,58120230137Equinor
08-102,000,00064,51620230138AkerBP
11-13700,00022,58120230139Equinor
12-141,000,00032,25820230140ABP
13-15700,00022,58120230141Equinor
14-16700,00022,58120230142Equinor
15-17700,00022,58120230143Equinor
16-18700,00022,58120230144ABP
17-19700,00022,58120230145Equinor
18-20700,00022,58120230146Total
19-21700,00022,58120230147Equinor
20-22700,00022,58120230148Equinor
21-23700,00022,58120230149Equinor
22-24700,00022,58120230150Equinor
23-252,000,00064,51620230151ABP
26-28700,00022,58120230152Equinor
27-29700,00022,58120230153Total
28-30700,00022,58120230154Equinor
29-31700,00022,58120230155Equinor
30-01700,00022,58120230156Equinor
Total BFOET*21,000,000677,41937 cargoes--
Total Johan Sverdrup21,800,000703,22627 cargoes--
Total BFOET Plus Johan Sverdrup26,600,000858,06564 cargoes--

Julien Mathonniere, London