S&P Global Platts editors Joel Hanley and John Morley discuss the changing competition affecting North Sea crude oil, as the Brent/WTI and Brent/Dubai spreads blow out to fresh levels. Can US grades compete for European refinery share, and what of the European oil slated to go to Asia?
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JH: Hello and welcome to Platts Global Oil Markets podcast for the 23rd of August 2017. I'm Joel Hanley, and joining me today is John Morley who's our editor on the North Sea markets, that crucial home of the Dated Brent benchmark; and it's from that desk that we really observe a lot of the relationships with the North Sea markets, particularly two of the main barometers of inter-regional crude oil demand: that being the Brent-Dubai spread and the Brent-WTI spread.
Of course, Brent-Dubai is the relationship between North Sea Light sweet crude oil and Middle Eastern heavier sour oil, so there's that interplay between the quality. But, there's a fairly similar quality between Brent and WTI -- or various grades as part of WTI -- in the US these days.
Now, we're seeing quite a large spread on both of these instruments at the moment, so I thought we'd get John along to explain to us all exactly what's going on and what this means for that North Sea market.
So, John, Brent-Dubai, it's blown out a bit and what does that mean for the traditional flow of oil -- the arbitrage oil -- that you occasionally see from the North Sea over to Asia.
JM: Well, the Brent-Dubai spread is one of the key leading indicators on arbitrage flows of Brent-related crude to the Far East and we've had a very narrow spread for the majority of the year.
That was largely due to the cuts that OPEC made last year on mostly heavier, sourer crudes, so what that did was restrict the supply of heavier sourer crudes and thereby increase its price versus the lighter sweeter crudes that Brent traditionally will be based on.
So, we've had quite a narrow spread for the vast majority of the year and that's been very encouraging of the arbitrage of Brent-related crudes, primarily Forties to the Far East.
But, we've seen a bit of a change in the last few weeks: sweet crudes across the Atlantic Basin have really strengthened a lot; differentials have improved in areas like West Africa, the North Sea, the Mediterranean, and the general Brent swaps complex has been very strong as well.
So, we've seen a significant widening of that spread as Brent has gotten stronger, and obviously if Brent-related crudes are increasing in price versus Dubai-related crude, then that's going to discourage people from sending oil to the Far East.
JH: And, critically, as part of that OPEC cut, as we've mentioned before in this podcast, and certainly we've written about it as well, the two main providers of light sweet crude in the OPEC complex -- Nigeria and Libya -- are exempt from this cut, so as a result, they're continuing to grow: we hear mixed stories out of Libya in the last couple days actually, but even so, there's still a lot of sweet, so they have had a little impact on that sweet sour balance, but generally there has been a fair amount of light sweet.
So, speaking of that light sweet crude, in the US we started to see exports coming out increasingly, since the change in the rules over there. Brent/WTI has now blown out to, what, four dollars or something?
JM: Yes, over four dollars, so both the first month and second month Brent/WTI spreads are as wide as they've been for nearly two years; it's gotten very wide again based on the strength of Brent.
Now, what we would expect when that kind of spread widens, and when Brent becomes more expensive, is that European refiners would look to the US and look to import some US crudes over over here, given it's kind of relative cheapness, I guess; and it's definitely an option that some European refiners are looking at at the moment; a couple have mentioned it to us.
So, the first factor they'll be looking at in this instance, is how the general WTI complex is performing, and at the moment, in terms of the outright price, it's quite a bit lower than Brent, largely because the WTI futures are quite a bit lower than Brent futures.
But, kind of working against the arbitrage, at present the quality differentials on some of these US crudes like Eagle Ford, WTI Midland, are quite high, so maybe the gap between Brent and WTI isn't quite as big as we would first think from...
JH: On a refinery basis...
JM: Yes, exactly...
JH: And there's the added risk of actually dealing with the physical property?
JM: Yes, but it's definitely an option that refiners over here are looking at at the moment.
JH: Right, so, have people been changing their plans at all? I mean, we've heard, I think, stories of traders not sending so many large vessels over to the Far East of course.
JM: There has been a bit of reduction in the flows we've seen going to the Far East, at the moment. For example, at the moment, looking at September, we would expect normally by this point in a trading cycle to have seen probably about 3 VLCCs booked to go from Hound Point to the Far East in September...
JH: And each of those is two million barrels...
JM: Exactly, yes, two million barrels or a little bit over, sometimes, and we haven't seen any yet: there was one trading house that did book a ship for early September to go to the Far East, but in the end they decided against it, and they reoptimized, given how strong local demand has been in Northwest Europe for BFOE barrels.
And, I think that demand has been one of the key factors in driving up the whole Brent complex in the past few weeks.
JH: So, this potential competition from the US could perhaps impact North Sea differentials or could weaken them slightly, I suppose.
But, on the plus side on the differentials, I suppose that we're also entering maintenance season, and it's round about now, the seas are a bit calmer, the refiners have done what they need to do, and so now we tend to see in August and September, the producers of oil in the North Sea, shut down or at least retool some of their production.
Are we seeing much of a smaller program, because that can of course give a boost to crude differentials?
JM: Yes, absolutely, that's been a key factor I think in boosting the BFOE market in the past month. In August, the largest crude grade in the BFOE market, Forties, underwent substantial field maintenance and it was to some of the lighter fields that feed into the Forties pipeline system.
So, we saw quite a restricted Forties program in August; so the overall BFOE cargoes supply was reduced by quite a bit, and that reduction in supply has really helped to boost differentials in the past few weeks.
Obviously, now we're moving out of that period, September is looking like a more average period in terms of loadings on Forties and all the other grades, so that element of support is going to be eliminated as we move forward into September trading.
JH: Well, thank you very much for the insight, John, and thank you to you all for listening today. If you'd like to know more about this story and other coverage and analysis of the oil markets, please visit our website Platts.com.