Atlantic Basin crude markets in sanguine mood ahead of summer

The Atlantic Basin oil market is finally starting to strengthen with crude differentials rising to recent highs on an improved demand outlook, trading sources said June 2.

With ICE Brent futures crossing the symbolic $70/b mark buoyed by projections of a tighter crude market, a sense of optimism has been growing among participants.

"The market is quite good. Demand is better in Europe as lockdowns end. I don't see much downside... it's a question of when we reach the ceiling," one Europe-based crude trader said.

Platts Dated Brent, the bellwether for physical crude, was a touch lower than $70/b, suggesting some lingering doubts among real-world oil players.

Market structure also suggests some doubts, with Brent CFDs and Dated to Frontline contracts moving from backwardation to a flatter structure. North Sea grades are an outlier in seeing some pressure on differentials.

But relative strength is undeniable. Differentials against that benchmark for key baseload crude grades have staged something of a recovery in recent weeks, with refiners paying up to secure oil in the hopes of a summer demand boost.

A European mainstay, Russian Urals, has seen values rise around $1/b in recent weeks as local refiners such as Finland's Neste come back from maintenance and others seek to boost runs.

Even the ramp-up in supply as OPEC+ eases its production quotas has not dampened the mood, with extra volumes lapped up by local refiners.

Crudes such as Azerbaijan's Azeri Light and Kazakhstan's CPC Blend have seen similar support, pulling off near 12-month lows in the last month, while the boost has also helped lift Libyan and West African oil. A rising tide lifts all boats.

While much of the support has come from European refiners betting on a summer mobility boost, solid Chinese interest and the tentative return of Indian buying has also helped clear barrels.

Russian ESPO and many West African grades have seen values rise on the back of increased buying from China as refiners come back from seasonal maintenance and draw from stocks.

Tighter fundamentals

This comes as refiners worldwide are looking to increase their runs in June and July.

"Refinery downtime will be dropping as economic activity improves and as COVID 19's effects are diminishing, except in a few regions such as South Asia, as vaccine rollouts increase in various parts of the world," S&P Global Platts Analytics said in a recent note.

Most oil analysts expect fundamentals to tighten, with stock draws likely to accelerate through to August.

One of the reasons for a much tighter market has been the decision by OPEC+ to hike crude production only gradually.

On June 1, the coalition decided to proceed with increasing its output quota by 840,000 b/d in July but has not revealed its output policy for August and beyond.

The continuing pandemic in Asia and the prospect of sanctions relief for Iran have pushed the producer coalition to continue with its wait-and-see mode for now.

S&P Global Platts Analytics expects global oil demand to grow by 5.6 million b/d in 2021 from 2020's reduced baseline, with global supply only rising by 3 million b/d from 2020 levels.

Some analysts are even warning that the market could overtighten without more OPEC+ supply, and that prices would overheat.

"Over the next six months, I see very clearly that there is a strong recovery of oil demand in the US, China, Europe and elsewhere, and if OPEC+ sticks to their current policies, we may see a wider gap between supply and demand," IEA Executive Director Fatih Birol said on June 1.

But one supply threat does remain: Iranian oil.

Iran is preparing for a quick ramp-up of its output and exports amid expectations that the US, Iranian and European negotiators will be close to agreeing a nuclear deal in the coming weeks.

"The Iranian flow will first go to Asia, but that will affect European sour indirectly," said another Europe-based crude trader. "Then ultimately it will flow [into Europe]."