JUNE 2018 in review
Published 10 JULY 2018
The European crude oil market throughout June was underpinned by weakness in the physical, however, the futures market was dislocated from the physical fundamentals. The differential between ’light’ crudes and ‘heavy’ crudes narrowed as expected with oversupply in light crudes and light end products. This was demonstrated in the physical crude oil grades weakening to a stagnant benchmark in Europe, and gasoline and naphtha markets easing. This dislocation between the benchmark and futures was also seen in WTI, with the WTI Benchmark showing strength in response to high utilization rates and Cushing stock draws, and the grades priced to the Cushing benchmark holding weak as they continued to struggle to clear. The strong draws and utilization rates surpassed yearly highs and induced a violent spike in volatility, suggesting the rise in price action was a consequence of a shift in balance rather than an absorption of oil. The Eastern market strengthened across both the Crude and product markets: there was a noticeable pull for products, especially fuel oil, over the course of June as East/West traded up.
WHERE ARE WE NOW?
WEAK EUROPEAN MARKET
As we enter Q3, we are expecting a continuation of crude draws due to increased summer demand. However, this has yet to filter through into Europe since there were successive draws in the US whilst in Europe local grades struggled to clear. This has been evident in the Dated Brent benchmark as it has maintained its weakness over the course of month.
Demand for products is typically higher during the summer. However, product stocks have continued to build, which has put pressure on the market, particularly towards the lighter end of the barrel. Over the course of the month, the time spreads have been under pressure, easing from stagnant May levels. The fuel oil market, however, has been disjointed from the rest of the barrel as the cracks saw an uptick and gained momentum with Eastern buyers pulling the residual product over in June. This supported refinery margins and offset the losses at the light end of the barrel.
US Crude market remains inherently weak,
but the prompt is strong
The discounts of US grades to competing European crudes (e.g. WTI Midland vs Dated Brent) maintained weak levels over the course of the month. However, with the WTI Benchmark prices basis Cushing’s stocks, demand et cetera; as the US drew from their stocks in Cushing, the benchmark traded up. Of note, was towards the end of June where the US’s prompt market dislocated enormously from the rest of the curve, putting huge upwards pressure on the WTI structure. The driving factor of this appeared to be the high utilization rates of 97% (highest since 2001) and the biggest draws from Cushing stocks since 2005. The trade counterparts long WTI derivatives have the incentive to draw out of Cushing and move the crude either into local refineries or export out of the region to tighten the supply in the Cushing region. Because the WTI benchmark is priced only off this small region only, the influence on the benchmark and its time spreads can be amplified.
Weak Dated Brent with no outlet to Asia
The Dated Brent structure remained weak over the course of the month. Forties has not managed to clear towards Asia during June, which is typically a main outlet. Additionally, local demand failed to sufficiently clear North Sea barrels, and so the benchmark crude dropped. We believed a few market players were positioned short over June with the rest of the market not particularly leveraged as the futures volatility deterred aggressive positioning in the paper market.
The Dubai benchmark priced strongly over the course of the month. Cargoes of sour grades, on the other hand, were trading at discounts to their OSP. As a result, OSPs for Asia-bound cargoes are expected to be lower for July. Conversely, there was a slightly tighter supply of heavier grades and stronger residual crack spreads which we expect will keep heavy crude OSP differentials supported, as the demand for fuel oil prevails.
Naphtha crack spreads against the Dubai benchmark, fell by roughly $2.10 / bbl for the month whilst distillate cracks were down roughly $1.30/bbl.
Futures and Physical disconnection
We expected the futures and physical market to realign over June, which didn’t quite happen. The physical benchmark in Europe continued to price out weak, as well as the European grades which price against this benchmark. In the East, the benchmark held strong, whilst the spot Eastern grades weakened trading at discounts to their OSPs. In the US, the benchmark and prompt showed signs of recovery although the grades that priced relative to the benchmark weakened.
Short WTI Flat Price 66.89 to 73.35
Short QZ WTI
1.35 to 4.76
Short UZ Brent
1.09 to 0.90
Short UZ Naphtha
9.75 to 10.25
What did we expect last month?
Sweet barrels struggling to clear locally & US barrels
putting further pressure on complex
Continued pressure on WTI-Brent and WTI grades
Bearish Naphtha as refineries run more light crudes