October Pricing Analysis - North American Crude

Summary

War risk, not a US shortage, drove October: NYMEX WTI rallied $10.97/bbl over W3 and W4 even as Cushing stocks built. Gulf sours squeezed higher into Nov expiry after Hurricane Isaias, but the premium vanished on Dec. SGC broke away to an $8.84/bbl discount to Mars after its biggest refiner buyer walked, and the curve prices only a slow recovery. Refining margins fell by a third or more as crude outran fuel prices.

Market activity

• SGC trades fell 31% to 102, the only grade where activity dropped. A US integrated major, September’s biggest SGC buyer with 34 trades, left the top five and moved its buying to Mars and WTI East Houston. Sellers were led by a national oil company’s trading arm, followed by two European majors. With the main refiner bid gone, sellers had to cut price, which matches the fall to -$7.61.
• Trading across the WTI Triangle (Midland, East Houston and Cushing) rose 13% to 715 trades, but most of the growth was inland. Midland grew 16% to 397 as two refiners stepped up buying to absorb more supply from the US major and midstream companies, which kept the Midland differential steady. East Houston grew 9% to 274, where a trading house that was a top-three buyer in September became the top seller as the closed arb left export barrels to unwind. The US major and a state-owned Asian buyer took the other side, but not enough to hold the premium. Cushing stayed thin at 44 trades, with one refiner buying nearly half of them, so the ex Basin premium rested on little volume.

Price action

• NYMEX WTI jumped $6.37/bbl in W3 to a $96.47 weekly average and added another $4.60 in W4, as the market priced in US-Iran war supply risk. The rally reflected global risk, not a shortage of US barrels, because Cushing stocks rose 1.862mb and 0.987mb in the weeks to 9 and 16 October (EIA).
• Gulf sours were squeezed higher into Nov expiry, then split apart. The Gulf Coast Sour Index rose $2.27/bbl to $1.92 in W4 but closed October at -$5.31, below where it started. Mars led the squeeze, up $4.71 to $6.05 in W4, after Hurricane Isaias shut in up to 72% of Gulf offshore output on 8 and 9 October. It then fell $3.89 on Dec, so the premium did not carry into the next contract. SGC split the other way, falling to -$6.68 in W5 and doubling Mars-SGC to $8.84/bbl, as its biggest refiner buyer moved its bids to Mars and WTI East Houston.

Cross-market dynamics

• Crude rose faster than fuel prices, so US Gulf refining margins fell by a third or more. The sweet 3-2-1 crack dropped from $71.97 in W1 to $48.01 in W4, and the sour crack fell further, from $71.76 to $42.57, because the Mars squeeze made sour crude expensive. Once the sour premium reset on Dec, the sour crack recovered $4.25 while the sweet crack was unchanged.

Curve structure

• WTI Midland is in backwardation, at $104.54/bbl for Mo1, $100.59 for Mo3 and $93.96 for Mo6.
• WTI East Houston is also in backwardation but flatter at the front, with $3.68/bbl from Mo1 to Mo3 against $3.95 for Midland.
• The East Houston vs Midland spread sits at $0.33/bbl but is in contango, at $0.60 for both Mo3 and Mo6. The market expects the coast’s premium to come back.
• The SGC diff sits at -$7.61/bbl but is in contango, at -$5.50 for Mo3 and -$3.00 for Mo6. The market expects a slow recovery.

Something to watch

• WTI backwardation stands at $11.16/bbl from Mo1 to Mo6, up $1.45 in October, even though Cushing stocks rose. That premium is war risk, not a US shortage, so it could shrink quickly if tensions ease. Watch the daily WTI Mo1-Mo6 spread and the EIA Cushing number every Wednesday. Renewed builds with no narrowing would leave the front exposed.
• East Houston trades $0.33/bbl over Midland now but $0.60 for Mo3 and Mo6, so the market expects the coast to recover within a few months. If the prompt climbs back toward $0.60, export demand is returning. If it slips below zero again, barrels are backing up on the coast. Watch the daily East Houston vs Midland spread and EIA weekly crude exports.
• The SGC diff sits at -$7.61/bbl but is in contango, at -$5.50 for Mo3 and -$3.00 for Mo6. October’s weakness came as SGC’s biggest refiner buyer moved to other grades. A return of that buyer, or the prompt moving back above -$5.50 by Dec expiry, would mean the recovery is running ahead of the curve. Watch daily