Prompt cargoes weigh on North Sea differentials, but traders see recovery ahead

While an ongoing excess of prompt cargoes has kept North Sea crude differentials moving sideways around multi-month lows, traders have remained optimistic for a recovery ahead, with an ongoing mixed structure seen across the two forward months encompassed in the Brent CFD complex similarly suggesting the market has found a floor.

An overhang of WTI Midland cargoes arriving across May and June in recent weeks has been pinpointed as a catalyst for the collapse of differentials of adjacent crudes in the Dated Brent basket, creating a difficult environment for sweet barrels to find homes.

Platts, part of S&P Global Commodity Insights, last assessed differentials for WTI Midland on a CIF Rotterdam basis at a 69.5 cents/b premium to Dated Brent May 14, hovering around a three-month low of a 67-cent/b premium as copious offering activity continues in the Platts Market on Close assessment process.

In fact, MOC sessions in recent weeks have seen some of the highest number of offers for WTI Midland left outstanding in the MOC since its introduction to the Dated Brent basket in 2023, with the highest being nine outstanding offers reached in the April 29 session.

Sources suggested that strong supply was at least partially responsible for the ongoing trend of relatively early public cargo nominations into the Cash BFOE chaining mechanism, with a lack of attractive bids in the over-the-counter market incentivizing the placement of some early-June Midland arrivals into chains.

Despite the looming prompt overhang, sentiment seemed to have taken an upbeat turn with market participants not seeing much further downside from recent lows.

"It still feels heavy, but once people rip off the band-aid and offer down, it goes quick," a source said.

Indeed, trades for WTI Midland CIF Rotterdam cargoes were seen in the May 13 MOC session following almost two weeks of strong offering activity without any fruition from sellers, including Gunvor, Saudi Aramco and ExxonMobil.

"We're seeing refiners reaching out to pick up Midland through the month of June now, and a bit of Eastern demand [is] creeping in," a second source said.

Paper market price in recovery

An expected recovery, even amid strong availability on the prompt, has been reflected in the Brent paper complex, with the structure present in the Brent CFD market showing a strong contango across May contracts dissipating into a backwardation for June.

Platts last assessed the prompter May 12-16 Brent CFD at a 39-cent/b discount to the May 26-30 contract on May 14. In contrast, the prompter June 2-6 contract was assessed at a 14-cent/b premium over the later June 9-13 contract.

Brent CFDs, which reflect the perceived value difference between prompt and forward oil in the Brent complex, can signal market players' expectations of physical value in the coming weeks.

Typically, the market for these derivatives is backwardated, with prompter oil valued higher than forward cargoes. During times of market weakness, the structure will invert to a contango, with contracts settling across a period of anticipated slackness in physical fundamentals converging in value.

It is slightly more atypical to see a mixed structure across the two forward months encompassed in the pricing period, which has been sustained since the beginning of the month.