Northwest European sour crude outlook constructive amid wide sulfur spread

European crude oil traders foresee strengthening differentials in the North Sea sour crude complex amid a wide sweet and sour crude spread.

Platts, part of S&P Global Energy, assessed the Dated Brent physical differential — reflecting light sweet barrels in the North Sea — at a premium of $16.81/b Oct. 15.

That's compared with the Johan Sverdrup FOB Mongstad physical differential of $5.685/b Oct. 15.

On a delivered basis to Rotterdam, two traders have estimated the spread between WTI Midland and Johan Sverdrup to be around $10/b.

For now, first-decade November loading Johan Sverdrup cargoes were last heard trading around a premium of $6/b over Dated Brent.

While North Sea sour barrels have benefitted from the same short-haul advantages as its sweet regional counterparts in the current freight environment, upward momentum in the prompt European sour market was hampered by competitively priced alternatives from the Middle East.

However, with light sweet crude barrels pricing at a hefty premium to sour volumes, market participants expect refineries to turn towards sour feedstock to maximize their margins.

"Johan Sverdrup should be a bit more popular on the back of [the wide sweet-sour spread]," a sour crude trader said Oct. 15, noting that Mediterranean sour barrels have strengthened. "All it will take is for an outage [from Middle East supply], and it's going to firm again," the trader said.

Several other Europe-based crude traders have acknowledged the potential for such a switch to occur, noting the cargo movements in the first half of the week.

"There're better margins if you can switch," another sour crude oil trader said, pointing to the spread on delivered cargoes in the North Sea.

Nevertheless, the economics of such a switch is a complex calculation that goes beyond the spot value of crude barrels alone.

For example, a slight retreat in transatlantic freight rates may complicate the sulfur economics for barrels in the North Sea region and narrow the sulfur arbitrage.

A third trader said there "hasn't been much evidence" of such a switch occurring yet, although it "would make sense for people to buy [sour grades]".

Platts assessed the US Gulf Coast-UK/continent Aframax freight rate at $182.79/metric ton Oct. 14, down $11.55/mt on the day. However, the figure still remains above its March 30 peak of $173.33/mt.

"Freight coming off changes the landed WTI economics, so I think sweet [grades] come off," the third trader said.

For now, traders are awaiting indicative levels for second-decade loading Johan Sverdrup with few cargoes heard trading for that segment.