The landmark agreement between OPEC and non-OPEC producers to coordinate a six-month crude production cut had ramifications for crude markets through the first quarter, with tighter sour crude supply in the Middle East helping to boost the value of Dubai relative to Dated Brent and consequently encouraging arbitrage flows from across the Atlantic Basin to Asia.
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The front-month Brent/Dubai Exchange of Futures for Swaps -- which is used to price arbitrage opportunities for Brent-related crude grades to the Far East -- narrowed rapidly as the production cuts got underway in January, dropping to an 18-month low of $1.11/b on March 22 from $2.60/b on December 1, shortly before the agreement was signed.
The EFS looks set to remain narrow moving into the second quarter, with OPEC's current production cut due to remain in place until the end of June.
The subsequent direction of the spread between Brent and Dubai will be largely determined by whether OPEC decides to maintain, or even extend, the production cut at its Vienna meeting on May 25.
FORTIES ARBITRAGE TO ASIA DEFINES NORTH SEA PHYSICAL MARKET
Price volatility in the North Sea physical crude oil market has been relatively restrained so far in 2017, in contrast to the large swings in differentials that were a feature of 2016.
The complex's performance through the first quarter was closely linked to the arbitrage of Forties crude to Asia, with differentials rising during periods of heavy outflows and dropping when the medium sweet grade had to find homes in the local Northwest European market, where demand was largely tepid.
Differentials traded within a fairly narrow band of Dated Brent minus 61 cents and plus 4 cents over Q1, having ranged between minus 95 cents and plus 33.5 cents in 2016.
For much of the first quarter, the economics were broadly supportive of moving Forties to the East: in addition to the narrowing Brent/Dubai EFS, the ever expanding VLCC tanker fleet has kept freight costs consistently low.
Seven VLCCs sailed to China and South Korea in January and the first two decades of February, before three successive VLCCs loaded and stayed in the North Sea on apparent floating storage operations in late February and early March.
With spring refinery maintenance drawing to a close in Asia, expectations are that as many as five VLCCs will head east in April, which would lend support to Forties and the wider Dated Brent complex in the short to medium term.
CHINESE 'TEAPOT' BUYING BUOYS WAF HEAVY CRUDE MARKET
West Africa's heavy crudes enjoyed a demand boost at the start of 2017 as the drop in heavy sour crude availability resulting from the OPEC/non-OPEC production cut forced many smaller refiners, largely in China, to ramp up purchases of alternative grades.
With lower volumes available from the Middle East and the resulting narrower Brent/Dubai EFS, China's "teapot" refiners turned towards West African countries like Angola, Republic of Congo and Chad. Higher refining margins on distillates and fuel oil in Asia also increased demand for heavy WAF crude.
Through the April trading cycle values climbed to multi-year highs for grades like Angola's Hungo and Dalia, while other regional grades such as Chad's Doba and Republic of Congo's Djeno achieved their highest levels since Platts began assessing them in 2015 and 2013 respectively.
In contrast, light West African crudes -- particularly those from Nigeria -- failed to attract the same degree of arbitrage interest and differentials remained under pressure in an increasingly competitive market for light sweet crudes in the Atlantic Basin.
Throughout the first quarter, the market struggled to absorb all the additional sweet crude, and Nigerian grades -- naphtha-rich Agbami and Akpo in particular -- found it hard to price into competitive regions like the Mediterranean.
As the trading cycle rolled into the second quarter, demand from China started to tail off and with the upcoming refinery turnaround season, trading sources expect that the "red-hot" Angolan prices seen in the March and April trading cycles will be difficult to sustain.
With the OPEC deal holding and the Brent/Dubai EFS remaining narrow, arbitrage flows of Atlantic Basin crudes from across West Africa to Asia are expected to continue. Asia's refiners still seem eager to sample discounted longer-haul crudes, signaling WAF crudes will continue to find homes there.
URALS STRUGGLES TO MAINTAIN DIFFERENTIALS FROM EUROPEAN BUYING ALONE
Asian demand helped to put a floor under differentials in the Urals market in February and March, although overall the market struggled to maintain the bullishness it achieved in late-2016 in the wake of the OPEC production deal.
Differentials for both Northwest Europe and the Mediterranean hit multi-month lows in March after demand from Asia -- specifically from China -- started to falter ahead of the spring refinery maintenance season.
The Urals market found it harder to compete for Asian demand despite a still narrow Brent/Dubai EFS, with sour crude availability improving in the Middle East as refineries there moved towards maintenance. As Chinese refiners exited the European market, other Asian buyers moved in, with India's Reliance sourcing Urals from Northwest Europe from the March loading program.
Market sources said that strength in Urals moving forward will depend heavily on whether or not Asian demand returns in force as seasonal refinery maintenance draws to a close, particularly given the steady rate of exports of the grade out of both the Baltic and the Black Sea.
Light sweet crude grades in the Mediterranean struggled at the start of the year, with all but Azeri Light dropping in value due to the ongoing oversupply of sweet barrels in the Atlantic Basin. The recent uptick in US exports out of the US Gulf Coast has exacerbated this sense of overhang in the region, with US barrels landing in both Northwest Europe and the Mediterranean.
In contrast, Azeri Light saw heavy volumes move to Asia in both February and March, bolstered by the narrow EFS, although -- as with Urals -- eastern demand started to falter as the quarter drew to a close.
Market expectations remain bearish for the Mediterranean market given the heavy export programs for CPC Blend and Libya's slow, intermittent return to the international market.
STRONGER RUBLE PRESSURES RUSSIAN DOMESTIC CRUDE PRICES
Russian domestic crude prices came off steadily through the first quarter as a strengthening ruble offset the impact of firm Brent levels on export netbacks, used as a gauge for domestic trading.
Netbacks were boosted in January in the aftermath of the "tax maneuver," which reduced the marginal export duty for crude to 30% from 42%. However, the bounce was short-lived as refinery demand for crude was supported by firm distillate and fuel oil prices.
The equalization of Russian rail tariffs, which affected products such as gas condensate distillates, naphtha and MGO, had hardly any impact on demand from small and medium-sized refineries that secure their crude on the spot market.
Most of Q1 was also defined by a surplus of supply on the domestic market with some volumes, especially of Siberian Light, subsequently heading to export markets.
Demand is likely to remain lower in the next few months as a host of Russian refineries are heading into their seasonal spring maintenance.
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