Sluggish North Sea Trade Shows Need to Balance Slate
- February exports of Brent, Forties, Oseberg, Ekofisk and Troll (BFOET) that comprise the dated Brent pricing basket are flat on the year at 707,000 b/d.
- Johan Sverdrup is at 700,000-plus b/d for the second straight month and remains a core cover for absent Russian barrels.
- The forward Brent structure shows that the regional refining market is saturated with sweet crude and needs to rebalance with heavier grades.
Except for Forties, physical differentials remain unseasonably strong given the softer demand for light, sweet from regional refiners who are trying to “heavy up” their feedstock to make more diesel.
The Brent forward structure is showing a shallow contango, usually a sign of an oversupplied market, while on Jan. 4 dated Brent dropped hard to around $76.30, on level with the July 2024 contract on the paper market.
The trading cycle for March-loading barrels of North Sea crude is off to a sluggish start. The usual buyers of Forties, sometimes considered as a potential, albeit lighter, alternative to Urals, have not yet shown up.
Sizable volumes of Forties usually go to Germany, Lithuania, the Netherlands, or Poland. But so far only one spot cargo has shipped to BP in Rotterdam, according to Kpler data. The last Forties was done at an 80¢ discount to dated Brent.
Other grades in the BFOET basket are still showing hefty premiums, ranging from about $2.95 per barrel to dated Brent for Ekofisk to $4.40/bbl for Troll. But traders think they will come off soon for lack of prompt appetite for light, sweet crude.
“BP and Mercuria are already in the [Platts trading] window on the offer side as those cargoes become more prompt, I am sure they will offer cheaper," a trader told Energy Intelligence.
|North Sea Loadings for February and January 2023|
|Total ('000 b/d)||--||--||707||--||716|
|Source: Energy Intelligence|
Refiners in Europe have been pushing their runs to produce more middle distillates, especially diesel, which may be in short supply when the EU ban on Russian refined products enters force on Feb. 5.
Refineries have been processing more light, sweet crude to skirt the higher gas prices, which are part of their processing costs, but they are also keen to take advantage of attractive very low-sulfur fuel oil prices in the shipping sector. However, this strategy has amplified the shortage of diesel and created a glut of lighter, lower-value products, notably naphtha and gasoline.
Refiners hence need to rebalance their crude slate if they want to keep up with the market’s diesel requirements. Switching to a heavier slate could free up capacity by producing more diesel on the first run and thus lower overall utilization rates. This, of course, implies buying heavier crude, which is bearish for BFOET crude demand.
The expected weakness in prompt demand is already visible in the Brent forward market.
The weekly Brent CFD swaps, which tie the Brent forward and dated Brent prices, have flipped again into a shallow contango over the front six weeks. Dated Brent is now trading more than $1.70/bbl below the front-month paper contract and fell below $77/bbl, suggesting that the physical market has temporarily gone cold turkey.
“I think we’ll see the contango roll down further both on spreads and then on the CFD curve,” a source said. This will add to the geopolitical risk premium linked to the war in Ukraine.
The market has essentially normalized and is now refocusing on more immediate threats such as recession and the delayed return of Chinese demand.
Technical traders note that the Brent flat price remains well below its 55-day and 200-day moving averages of $89.01/bbl and $100.67/bbl, respectively, which are usually considered key support levels. It means there is more scope for further price slide until Brent has found a stable floor.
|North Sea Loading Program for February 2023|
|Total BFOET*||18,600,000||664,286||33 cargoes||--|
|Total Johan Sverdrup||19,700,000||703,571||27 cargoes||--|
|Total BFOET Plus Johan Sverdrup||24,400,000||871,429||60 cargoes||--|
|*BFOET stands for the five North Sea benchmark streams: Brent Forties, Oseberg, Ekofisk and Troll. Source: Energy Intelligence|