09 Jun 2021 | 14:26 UTC
Spotlight: Brent flat price breaks $70/b, structure in solid backwardation, but physical diffs still lag for now
By Sergio Baron
Highlights
S&P Global Platts Analytics expects oil demand to grow by 6.9 million b/d from May to August with a corresponding supply increase of just 4.6 million b/d. We assume Iran full-sanction relief by September with production to grow by 1 million b/d between May and December.
Markets are reacting to the bullish summer fundamentals despite the likely end of sanctions against Iran. The Saudis are signaling a position of "wait and see" and not preemptively filling the supply gap.
A version of this Spotlight from S&P Global Platts Analytics was first published June 2.
Crude runs will increase, ramping up more in the West than in the East, and this should create a tighter physical crude market over the next 30-60 days. We expect physical differentials to be the last piece to move, as runs will go up and stocks will draw. Urals, for example is trading at Dated Brent minus $1.60/b from, up from minus $2.75/b at the recent lows.
West African crude physical diffs should also increase, catching a bid from China (Angola) and India (Nigeria). North Sea physical markets are vulnerable as they strengthened materially during the FPS pipeline maintenance which ends in less than 15 days. Physical North Sea diffs should lag other Atlantic Basin grades.
Flat price is breaking $70/b on ICE Brent and should remain supported until the end of the summer, with few fundamental headwinds, but is always susceptible to a change of sentiment on the macro front. Simultaneously, structure is performing well and trading in solid backwardation. We have previously mentioned the September-December ICE Brent spread, which was trading at $1.05/b (35 cents/b per month) just a few days ago and is currently at $1.50/b (50 cents/b per month). We expect September ICE Brent to be the futures contract with the most potential to capture the bullish scenario in terms of timing.
Platts Analytics expects that the fundamentals will continue to tighten, sequential draws will occur, OPEC+ will need to provide extra supply to the market to temper the deficit, flat price and structure will stay firm during the summer, and finally, crude physical differentials will improve decisively as crude runs increase.
