OIL QUARTERLY: Crude markets at historical lows as pandemic, price war take toll

The crude market enters the second quarter of 2020 in the midst of its sharpest-ever drop in demand, as the coronavirus pandemic has forced most of the world to go into lockdown, dramatically reducing requirements for refined products, particularly gasoline and jet.

S&P Global Platts Analytics now expects oil demand to shrink by 16 million b/d on the year in April, with the whole of 2020 likely to show a fall of 4.5 million b/d from 2019.

Uniquely, the sharpest demand contraction ever recorded struck just as the world's biggest oil suppliers, Russia and Saudi Arabia, backed away from a production agreement and plunged into a battle for market share.

Two days later Saudi Aramco announced its official selling prices for April: for most European buyers it cut most grades by $7-$8/b and offered to supply more oil.

These events have completely transformed the oil market, and thrown fundamentals out of kilter.

Dated Brent at 19-year low

On January 2, 2020, S&P Global Platts assessed the key Dated Brent benchmark at $66.09/b. Through the first quarter of 2020, the value of the benchmark fell over 73% to hit $17.79/b on March 30, its lowest since December 2001.

In the first two months of 2020, values of key North Sea grades Brent and Forties fell steadily as refineries looked to sweeter grades such as Ekofisk along with imports from other regions as the International Maritime Organization's sulfur cap came into effect on January 1.

The spread between Brent and Forties differentials to those of Oseberg, Ekofisk and Troll widened. Regional North Sea grades such as Statfjord and Gullfaks also garnered support from strong demand from regional refineries at this time.

The first North Sea grades hit by weakening refinery demand were Forties and Johan Sverdrup. These two grades typically arbitrage to China and run cuts in the region meant that demand in Asia for these crudes largely dried up. The remaining North Sea grades also came under significant pressure as European refineries had no choice but to cut runs because of rapidly shrinking global demand for oil products.

As Chinese refinery utilization rates started to pick up toward the end of March, several VLCCs were fixed or put on subjects to take North Sea crude to Asia through April and into May.

This may provide some support as the market remains weighed down by limited demand in Europe.

Urals battles for market share

Urals loading from the Baltic, Europe's largest single crude stream, ended Q1 with differentials basis CIF Rotterdam not far from where they started the year.

Daily exports of the medium sour grade have averaged 1.49 million b/d between January and March, up 11% from Q4 2019 when a couple of programs were unusually short.

Urals exports are likely to grow further in the next three months as Russia competes to protect its market share from Saudi Arabia.

Urals' highest value in Q1 was hit in mid-February, a discount of just 50 cents/b to Dated Brent, when traders said that ExxonMobil had been buying up the Russian oil on the spot market after opting not to take its full allocation of Saudi crude. ExxonMobil was unavailable for comment.

Assuming that Saudi Arabia continues with the aggressive pricing policy that it demonstrated a month ago -- official selling prices for May are due in a few days -- it's likely that European refiners will make the opposite switch and favor Persian Gulf grades over Urals.

But demand from China re-emerged towards the end of March. China's Unipec has picked up Baltic-loading Urals, taking advantage of the contango in Dated Brent and its relative weakness to Dubai prices.

Med sweet values plunge

The year started with news of an oil blockade in Libya due to a protracted civil war, taking more than 1 million b/d of light sweet crude from the market.

But this has not managed to tighten the oil market, as demand destruction from the pandemic continued to intensify.

The most bearish grade in the Mediterranean sweet complex has been CPC Blend, which is considered a close switch for Arab Extra Light, the Saudi grade that Aramco priced at a discount of $8.10/b to ICE Brent in April.

CPC differentials are now at a similar discount against Dated Brent, the lowest in at least 20 years.

CPC relies on demand from Asia to clear the 1.5 million b/d, and with that market the first to suffer from coronavirus-related restrictions, the grade faced an overhang in February. Since then, refineries across the Mediterranean have cut runs and stopped buying crude, with many operating at their technical minimum, which is as little as 30% of capacity.

This has wiped out demand for other grades too, including the sweet grades Azeri Light, which is also at its lowest differential in 20 years.

WAF struggles without China

At the start of the year, support for West African crudes came from lower freight costs, Libyan supply outages, and their suitability for producing IMO-2020 compliant fuels.

But the impact of the coronavirus outbreak in China caused differentials for crudes from Angola and Republic of Congo – which rely on China for the majority of their demand – to plummet into negative territory.

As the virus spread worldwide, Nigerian crude differentials plumbed record lows in March as demand weakened.

Differentials for Nigeria's Bonny Light flipped from a premium to Dated Brent of $1.70/b at the beginning of Q1, to a discount of $3.60/b by the end of March.

Similarly, Angola's Dalia fell from a premium of $1.90/b to a discount of $4.15/b in the space of three months.

With an ample supply of crude likely headed into floating storage, freight rates have risen, compounding the pressure on prices.

But Chinese buying interest is gradually returning, as traders of crudes from Angola and Republic of Congo look to capture end-user interest to help clear the glut.

With Russia also pumping more oil and many European refineries having ceased purchases, sellers of crude are now wondering how long it will take to fill available land and floating storage. Most analysts expect storage space to run out by mid-May.

Russian exports to rise

Russian domestic crude prices tumbled at the end of Q1, tracking the wider oil complex.

Despite the cheap crude, refineries were concerned that low international product prices could hit their economics, although the impact could be somewhat offset by a domestic market that remained better supported due to tight supply.

A host of Russian refineries are heading into their spring maintenance, which would reduce availability of oil products, but also mean greater availability of crude that would need to be channeled to export markets.