European crude differentials slump on week amid ongoing price war

London — European crude differentials have fallen significantly across the board this week, as a combination of bearish fundamentals hammered spot price values.

The key Dated Brent international benchmark has fallen more than $20/b through the week to $30.805/b as of Thursday, and down 39.41% since March 5, with competitive offers in the Market on Close assessment process seen throughout the week, and the benchmark fell below $40/b Monday for the first time since April 2016.

Oseberg – which set the Dated Brent assessment Thursday – was assessed by S&P Global Platts at a premium over Dated Brent of $0.895/b, down 34.5 cents/b on the day, and down 63.4% since March 5.

Last Friday Russia refused to agree to further crude production cuts and, with the end of the current OPEC+ production cut agreement fast approaching, Saudi Arabia's Ministry of Energy on Wednesday sent a directive to Saudi Aramco to increase its maximum sustainable capacity to 13 million b/d.

This followed Aramco announcing Tuesday it would provide its customers with 12.3 million b/d of crude in April and a sharp reduction in Saudi OSPs on Sunday.

"What the Saudi did to OSPs has had a huge knock-on effect in the market," a trader said.

Following the release of Saudi OSPs, other producers such as Abu Dhabi's ADNOC, Iraq's SOMO and Kuwait's KPC all reduced their OSPs and many market participants expect the Nigerian OSPs to follow suit.

North Sea traders have seen an extremely volatile market, with physical differentials sliding in value and the paper market also showing signs of significant weakness.

"Any sweet grade on the water will get hurt, differential wise," one trader said previously, with many sellers having to look at storage options amid contracting demand locally.

Multiple traders have said this week that the value of Forties to local refineries is as low as a discount to Dated Brent of $2.50/b, with the value in Asia not very different.

The paper market has been volatile throughout the week, with many traders looking to balance their exposure rather than take large positions amid the uncertainty.

The Month 1 Cash BFOE contract – currently May – was assessed by Platts at $32.76/b Thursday, down $18.65/b week on week.

Pressure on the prompt is clearly demonstrated in the change in the Brent CFD structure over the past week.

Platts assessed the March 16-20 CFD at a $1.08/b discount to April 13-17 Thursday, compared with a week ago when March 16-20 was at a 73 cents/b premium over April 13-17, representing the switch from a backwardated to contango structure.

Urals

In the Mediterranean crude complex, differentials for CPC Blend have fallen furthest in response to Saudi Aramco's price cuts. The world's largest oil producer reduced the price of Arab Extra Light by $7/b for buyers in the region, and the grade is seen by some as a substitute for CPC.

An Aframax of CPC Blend was assessed on Thursday at Dated Brent minus $4/b on a CIF Augusta basis, its lowest level since June 20, 2012.

The current market dynamic is a reversal of the movements in the aftermath of the attack on the Abqaiq oil complex in eastern Saudi Arabia on September 14.

WAF

The West African market had already been under pressure from lengthy supply before the Saudi price cuts darkened the outlook further.

"You can't have Saudi [Arabia] and Iraq cutting by $5-8 and have refiners still paying for WAF at the same prices," a trader said.

The downward pressure on values had been compounded by a spike in the cost of freight, traders said. The rate for a VLCC from West Africa to East Asia jumped to $43.22/mt Wednesday, nearly 2.5 times Friday's value of $17.83/mt.

Nigeria's Bonny Light was assessed at a premium of 35 cents/b over Dated Brent Thursday, down 85 cents/b from the start of the week. Angola's Cabinda was assessed at Dated Brent plus 40 cents/b, down 80 cents/b.

Both grades are at their lowest levels since October, when a spike in freight rates sent differentials tumbling.

Uncertain outlook

Market participants will continue to look towards the headlines moving into next week for any potential resolution between Russia and Saudi Arabia in addition to any news regarding Libyan production, with many saying it is too soon to call the sentiment for next week given the level of uncertainty.

In an already oversupplied market, traders anticipate that should any headline regarding a resumption of Libyan production emerge there would be significantly bearish implications for the crude market in Europe and West Africa.

With significant volumes of WTI Midland expected to arrive into Europe through April and May, market participants will also be keeping an eye on demand for the grade.

Platts assessed WTI Midland arriving into Rotterdam at a 55.5 cents/b premium over Dated Brent Thursday, down 59.25% from March 5.