Barclays is expecting relative weakness in crude to be maintained until the tail end of Q2, when prices should begin picking up on improved demand fundamentals. Several geopolitical factors continue to put supply systems at risk. The markets, meanwhile have come under pressure again, with the Brent benchmark trading below $100/bbl this week.“The failure to completea full retracement in prices to within the $5/bbl range around $111/bbl is in line with our expectations, given the current state of the physical crude oil markets,” Barclays said.
Sour crude refining margins continue to outperform those of sweet crude, given attractive fuel oil cracks. And the resultant shift in crude slates by refineries optimising their utilisation rates has led to sour grades being favoured over sweet.
Russian Urals crude in the Mediterranean has been the primary beneficiary of this temporary shift in appetite. The Northwest European Urals differential has climbed every trading day for the past two weeks on the back of increased demand for the grade from refineries, while supplies in the Baltic for May have been smaller than usual (10 fewer cargoes than April, given a strong call on the crude within the FSU).
In West Africa, the Nigerian crude market has had a mixed week, with healthy activity in the Qua Iboe grade: 90% of June cargoes were sold, despite weak refinery margins. The active bids for Qua Iboe come on the back of a short overall crude loading program given the force majeureon Bonny Light, more so than on any improvement in distillate cracks.
Once again, Asian interest is notable here as a structural theme, with Indian and Indonesian refineries cited as major buyers.
Interest in other light grades, such as Agbami and Brass River, remains muted for now given weak naphtha cracks. Qua Iboe’s premium to Dated Brent has climbed above the $3.5/bbl mark, but further increases are likely to discourage European refiner interest given the already weak state of distillate margins in the region.
Overall, margins are now getting good support only from stronger fuel oil cracks, with sour crude well bid and sweet grades taking a back seat. However, Barclays sees the strength in fuel oil cracks as transient.
“Over the next three months, we expect the strength in fuel oil cracks to fade given the demand fundamentals for this refined product (weak demand from Japan, poor bunker fuel sales in Singapore, and Chinese teapots shifting from fuel oil to crude oil),” the report noted.
“Overall, we maintain our view that near-term weakness in crude could persist until the end of Q2, with a retracement expectedover Q3 as demand picks up,” it concluded.
Source: Barclays