Buoyant product cracks steady Nigerian crude sentiment.

Unwavering and exceptionally strong product cracks for diesel and jet fuel have steadied Nigerian crude values against increasingly challenging arbitrage flows to key markets, contrary to some expectations earlier in the July trade cycle.

Arbitrages to Asia and Europe for Nigerian grades have looked increasingly arduous given historic levels of backwardation in Dated Brent.

Steep Dated Brent structure typically pressures differentials for longer-haul West African grades aimed at Europe, advantaging shorter-haul crudes from within the continent.

"The strong backwardation in the market is eroding [West African] value fast, $2/b weekly rolls on some inter-week CFDs ... ridiculously steep," one Nigerian trader said.

Further, shorter-haul light sweets crudes from the Mediterranean, typically competing with Nigeria have softened in recent weeks on the back a longer supply outlook from easing maintenance and supply disruption.

Azeri Light, basis CIF Augusta, was assessed at a $6.50/b premium to Dated Brent June 14, down $2.20/b on May's high, according to S&P Global Commodity Insights data.

Even from within West Africa, competing Angolan grades such as Cabinda and Girassol have traded at record discounts to their Nigerian counterparts for July-loading, displacing some Nigerian crudes in Europe.

Looking to Asia, the things get even more difficult for West Africa. On top of historic backwardation, a strong Brent-Dubai exchange of futures for swaps was further obstructing flows east to typical Asian buyers such as India and Indonesia.

Indian Oil Corp. has only awarded 1 million barrels of Nigerian Akpo supplied by ExxonMobil in its latest round of tenders, opting for more competitive differentials in other West African grades and Abu Dhabi's Murban. Even then, the choice surprised some Asian trading sources.

"Look at the Dated/Dubai [spread], why should people pay for Dated [Brent linked] barrels at such differentials?" an Angolan trader added.

The Brent-Dubai EFS was last assessed at $12.84/b, after averaging $9.48/b in May.

Product cracks

At the same time, values in medium crudes such as Forcados, Bonga and Egina, after leading the West African market to record highs, have largely shrugged off the mounting headwinds despite some expectations that sentiment could soften.

Now with refining margins experiencing a second wind there is an emerging view among market participants that product cracks may be enough to offset pressures.

"I think I was probably a buyer of that view [market correction] when I was watching the cracks get squeezed. But they are roaring ahead again so there was not much reason I could point to for a correction," a second Nigerian trader said.

Diesel cracks topped $63/b this week while jet fuel cracks were hovering at historically high levels around $58/b, according to data from S&P Global.

Medium Nigerian crudes have some of the highest diesel and jet fuel yields on the market. Some 46% of Egina's refining yield lies in these middle distillates with that figure 43% and 41% for Forcados and Bonga, respectively.

Competing grades Azerbaijani Azeri Light and Angolan Cabinda boast only 35% and 27% yields in these products.

"They are cheaper for a reason. They do not have the volume or the yield," the second Nigerian trader said.

The prompter loading dates of Mediterranean crudes combined with production disruptions has also partially counterbalanced pressures from backwardation as buyers have been willing to pay up to secure non-prompt cargoes.

Other factors such as the Brent/Dubai EFS, have been strong throughout the year and so have been largely priced into the market, traders said.

Although some of the bearish mood continued to linger, other traders said there was little reason for sellers to lower indications while margins were strong.

"I think as long as you see cracks being nearly $50/b, that gives you your answer," a second Angolan trader said on the longevity of current differentials.

Tight European refining outlook

A tight European refining outlook meant there may be little scope of relaxation.

Europe's historic dependence on Russian products and underinvestment in domestic refining capacity meant it was not equipped to ease current shortages, one Mediterranean refiner said.

Indeed, some European refineries have been struggling to maintain elevated run rates to meet resurgent demand, partly owing to a lack of investment, industry executives said last week.

"We are having serious difficulties to keep up with demand after a few difficult years," Marco Schiavetti, chief commercial offer at Italy's Saras, said June 7 at the Global Executive Petroleum & Energy Conference from S&P Global.

"We have been cutting investment costs and now is difficult to maximize our jet and diesel ratio. $50/b margins are great, but we are facing serious difficulties in increasing runs."

Schiavetti also said refineries were facing more logistical delays as they are forced to source crude from longer-haul regions such as West Africa and the US to replace Russian Urals.