Light sweet crude flows raise questions over bullish market sentiment

The European market is awash with light sweet crude, raising fresh questions over the tightness of the oil market gripped by fear around the extent of lost Russian barrels.

Tepid demand for premium West African and North Sea grades amid an influx of US crude has left market participants wondering whether concerns over potential supply shortages have been overdone. That's especially when shunned Russian barrels in Europe have led to a re-ordering of flows away from traditional local buyers and heading to big oil consumers India and China.

The recent volatility of Platts Dated Brent is testament to the about-turn. Crude prices hit highs of close to $140/b in early March before dropping back to $104.52/b on April 6 and follows policy moves to tap strategic petroleum reserves by the US and coordinated with the International Energy Agency.

But it's the differentials that really tell the story. Take the North Sea's Forties differential, which was assessed at a 23.5 cents/b premium April 6, down from $5/b on March 22. Both grades had originally struggled to find buyers.

West African grades have turned into vagabonds as they search for a European home after a fall in interest in Asia. Differentials for Nigeria's Akpo crude were assessed down $1.70/b week on week at 60 cents on April 6, while Angolan Girassol was assessed down $1.10/b at $1.40/b.

"Europe looks a little stuffed with supply," one trader said. "With China down and more US crude flooding Europe it is tougher for WAF to place, especially with India feasting on Russian supply ... There is just a constraint on how much Europe can take."

With the crude markets factoring in lockdowns in China, the world's second-largest oil buyer, which has imposed restrictions to fight the spread of omicron variants, and questions around demand destruction arising from triple-digit oil, seeds of doubt have been planted into the market mindset.

And instead of the big drop-off in Russian supply, there has been a greater reshuffle to key flows: one that sees cheap Urals -- at record lows as assessed by Platts -- boycotted and self-sanctioned by Europe and sold to India and one that leaves West African grades looking elsewhere for buyers.

Indeed, despite widespread predictions among industry analysts of reduced supply, Russia plans to export even more of the Urals grade in April. Seaborne loadings are scheduled at their highest level in nearly three years at 9.26 million mt, according to a loading schedule seen by S&P Global Commodity Insights.

In a recently concluded spot tender, Indian Oil Corp. was heard to have taken 3 million barrels of Urals loading in May, while China is also snapping up Russian crude.

And with the announcement of the unprecedented US SPR release of 180 million barrels and the additional crude from IEA member countries, the market's steep backwardated structure has flattened, making storage a little less unattractive.

S&P Global on April 6 assessed the April 4-8 week Brent Contract for Difference at a $1.10/b premium to May 9-13. This compares with a $4.84/b backwardation assessed on March 21.

Tightness to come?

So far, there has not been an observable decline in liftings from Russian ports, but those are likely purchases made pre-war. So that could well change by the end of April.

"Cargoes typically trade three weeks or more ahead of loadings, and so we are just now entering the period when we might see a physical impact due to a reluctance from buyers to purchase Russian barrels," S&P Global analysts said in a note.

They estimate Russian crude production shut-ins "will eventually reach 2.8 million b/d on cuts to refinery runs, lower seaborne exports to Europe, and insufficient export capacity heading east."

Analysts suggest disruptions could exceed this level if conditions in Ukraine trigger explicit restrictions on oil exports to Europe, or even secondary US sanctions targeting shipments elsewhere. Recent comments from European and US officials indicate the odds of both will rise in the months ahead, with restrictions potentially phased in gradually.

So the additional barrels looking for buyers, especially those from West Africa, could soon come back into favor.

While the SPR release over a six-month period from May combined with the extra crude from IEA member countries mean 1.3 million b/d in additional supply through to end of October, there are still questions whether this will be enough to ease market jitters.

With OPEC+ suffering from capacity constraints and unable to raise production in line with monthly quota increases, the market has been fixated on the diminished spare capacity rather than the additional supply to come. Saudi Arabia and the UAE mean there is still around 2 million b/d in additional crude from the group if needed.

Anas Al-Hajji, an independent oil consultant, calls it a "mistake" to look at the decline in SPRs as bullish as "in reality any withdrawal from the SPR is an increase in supply." The same could be said for OPEC+'s output increases.

For now the market may be seeing enough extra barrels and have enough doubts about demand to assuage the previously runaway bullish rush.