European crude trading cycle dynamics shift amid demand uncertainty, sweet crude influx

London — As oil product demand struggles to pick up amid fears of second waves of coronavirus and further lockdowns, the European market has shifted into a more "last minute" stance for crude purchasing, according to crude traders.

"There are a lot of last minute purchases, waiting to see what margins will look like before buying -- although it doesn't necessarily mean you get cheap crude," said one crude trader. "It's better for refiners to do that than buy a crude, realize they don't need it, then either sell at a loss or sit on demurrage for four weeks."

There have also been numerous instances of selling crude at the last minute, meaning there is a market for it, he added.

Refinery margins across products had seen improvements since the lows of March and April once lockdowns started to ease throughout the region and the summer months progressed. But a recent resurgence of coronavirus infections across Europe has meant that uncertainty surrounding demand remains a pressing issue. As a result, crude traders say they have had to adapt their buying and selling strategies accordingly.

This trend has been particularly pronounced on the sweeter side of the barrel, as European refineries have been spoiled with choice not only with the local sweet Mediterranean grades -- of which there has been ample supply due to muted Asian demand, but also from longer-haul barrels out of region.

Unsold West African grades from Nigeria and Angola have sought European homes after reduced demand from key Asian buyers left much of the August-loading volumes available ahead of September trading.

"China was buying like crazy, then they just stopped," a West African source said. "WAF gets hit if they don't buy."

Additionally, subdued interest from Indian refiners -- where Nigerian crude typically sees firm interest -- left as much as 20 million barrels of August-loading Nigerian crude unsold, according to estimates by traders. With the unsold barrels looking to clear into Europe, they have faced an already crowded market.

US grade WTI Midland is arriving and due to arrive on European shores in greater quantities in August and September, leading many refineries to sell out of smaller positions on Med and North Sea grades and take a chance on inexpensive US crude.

"I would say the arrival rates are pretty steady for the next couple of months, in terms of US oil," a second trader said.

The lack of buying interest for European product from Asia has also been a contributor to the bearish sentiment, with an influx of light-sweet crudes the theme in Europe.

"Europe feels quite long everything," the trader said.

For sellers, there have been some frustrations with the stalled market but many said there was no choice but to accept the extended trading period, as few alternative regions were available to sell into -- including the normally buoyant Asian market. "Refiners are putting of buying decisions until much later, safe in the knowledge of sufficient choice, so with them taking such a relaxed attitude it's been a bit of a stand-off," said one seller of sweet crude.

A second seller said: "We also have to factor in both [poor margins] and the availability of cargoes -- so right now, buying cargoes will be a bigger decision than before, a lot of people asking for more time which is why we see such a slow trade."