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North Sea crude Forties spot differential surges to over month high on improved Asia arb

London — Spot differentials for North Sea crude Forties surged to the highest in more than a month Thursday on improved arbitrage prospects to Asia, the weaker contango needed to pay for floating storage costs and renewed local demand, traders said.

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"It's both [improved arbitrage prospects and improved local demand]," a trader said.

The Forties spot differential has rallied 38.5 cents/b since Monday, rising 19.5 cents/b from Wednesday to an almost five week high of Dated Brent minus 28 cents/b.

Forties, the largest of the four crude streams that make up the Dated Brent benchmark, has benefitted from improved arbitrage prospects to Asia, which were the best since the end of the June trading cycle, with the narrowest font-month Brent/Dubai Exchange of futures for swaps.

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Arbitrage of Forties to South Korea was still deemed unworkable against Abu Dhabi grade Murban and Russian export blend ESPO.

"Cheap freight [helps the arb]... [but] ESPO is still so cheap," a second trader said.

The September Brent/Dubai EFS was trading at $2.81/b in early afternoon trade Friday, having reached highs of around $3.90/b in early June.

But the first August loading VLCC fixture of Forties crude to Asia, seen this week, was said to be for floating storage in the UK Continent initially, before potentially making a later voyage to Asia.

The Manah VLCC was first reported to be fixed by Shell to load Forties August 10 to ship to Asia for a lumpsum of $4.25 million. Trade and shipping sources widely expressed skepticism, with the vessel said by several traders to be fixed to Vitol for an August 2 load date. Shipping reports Friday corroborated this, although Vitol crude traders could not be reached for comment.

"I heard the VLCC fixture is Vitol's for [floating] storage," a third trader said.

A fourth said: "The Manah is an early August loader for storage then South Korea perhaps."

In addition, cheaper VLCC freight rates meant buyers of Forties could lock in floating storage economics at higher spot differentials, while there was the perception that Forties could clear locally at stronger levels than a week ago, with a rally on Mediterranean sweet and North Sea heavy grades.

"There's two key things [driving the Forties rally]. Freight has been cheap with Hound Point/South Korea around $4.3 million... structure doesn't need to be as wide to pay for floating storage... there's also the tighter CPC program and Mediterranean sweets are in good shape," a fifth said.

But the Forties rally has seen the grade's cracking margin retreat to its lowest level in over 5 weeks, at $2.095/b Thursday, raising a question mark over the strength of demand from local refiners.

"Not sure [whether Forties will strengthen further]. I guess it depends on what happens on the bigger ships yet to load [and whether they are committed to Asian buyers]," a sixth trader said.

--Erduan Reid, erduan.reid@spglobal.com
--Edited by Jeremy Lovell, jeremy.lovell@spglobal.com