General index, Crude Oil Data

Global Market Analysis, 20 May 2022

This week's analysis looks at the global oil markets as Russia sees its global flows rerouted, and LPG activity in Asia picks up.

Europe giving up Russian oil sees global flows rerouted

By Chen Ee Woon

The European Commission, the executive arm of the European Union, announced earlier this month it wants to ban oil imports from Russia by the end of 2022. This would cover both crude and refined products. The UK has previously signalled its own phase out. While EU leaders now try to mollify Hungary, which like several other members states is particularly dependent on Russian flows, into acceding to its new policy, some countries have already indicated they will implement a ban regardless of the fate of the EU-wide decision.

Any political decision will be catching up with physical crude flows already being reshaped. Europe has started pulling barrels from the Mideast Gulf, Africa and the Americas, while Russian Urals instead move east. For example, exports of US crude to Europe were higher than normal in April, and this trend is expected to continue.

General Index, US Crude

The rerouting of flows has manifested itself in price spreads as well. The Atlantic spread, the difference between prompt WTI futures and prompt Brent futures, have widened remarkably in recent days as US crude supplies become tighter due to exports.

For many years, WTI traded at a discount to Brent; but on 18 May, the prompt WTI-Brent spread became deeply positive, beating expectations.

General Index, WTI vs Brent

It’s worth pointing out, WTI futures has yet to roll over to the July contract, and so the current spread has backwardated structure embedded within it. The strength of the current backwardation therefore played a huge part in propping up WTI versus Brent. Once the WTI rolls over to the July contract, the market will have a clearer picture if the inversion will persist.

Europe is also pulling barrels from the Middle East. General Index reported players like TotalEnergies and Repsol bringing cargoes of ADNOC grades from the Mideast to EU. For reference, ADNOC grades were previously sold almost exclusively to Asian customers due to shipping economics.

General Index, Brent-Dubai

“It is simple, Dated Brent is stronger now and the arbitrage is open,” said an experienced trader.TotalEnergies chartered the Moscow Spirit to bring 700,000 bl of Murban and Das to the West, and the tanker is now crossing the Suez Canal, according to vessel tracking.

At a higher level, a strong Brent Dubai EFS spread will continue to encourage the flow of medium sour barrels West.

The EFS is a measure of the feasibility of arbitraging Mideast crude. A high EFS suggest that the Brent complex is strong relative to Dubai and encourage barrels to move West, and vice versa.

With barrels moving into Europe, it is only natural to ask what is moving out of it. The answer lies in Russian Urals. Moscow has sought to aggressively market its crude to Asian markets where refiners not restricted by sanctions policy will take its oil.

India has emerged as a major market for Urals. The country has taken close to 40mn bl of Urals since the start of the war mainly via big name traders like Trafigura and Vitol.

Trading houses have mostly pledged to scale back Russian liftings from May onwards, but General Index expects Urals will continue to flow into Asia.

The main driver of continued flows is a new breed of smaller traders that are stepping in to fill the gap. Bloomberg reported names like Bellatrix and Livna based in Geneva and Hong Kong which continue to trade in Urals.

Conversations with ship brokers have also pointed to no shortage in Urals coming into Asia, at least in June.

“There are plenty to be honest,” said a broker based in Singapore.

Separately, General Index has also heard of Chinese teapots buying Urals as feedstock this month.

Rebound in Asia, Mideast Gulf LPG activity after Golden Week holiday

By Zulfadhli Kader

Activity picked up on LPG in Asia following the Golden Week holidays earlier this month, with renewed discussion and trades reported. LPG prices remained volatile, largely following crude levels, with intermonth spreads remaining at similar levels and premiums rising accordingly.

General Index, Far East LPG

May saw markets start off rather timidly. General Index heard only offers in the first week: H1 June was offered at Far East June plus US$7.90/MT (equivalent to US$828.9/MT) and another offer for H2 June at Far East June plus US$7.50/MT (equivalent to US$828.5/MT).

Activity picked up in the week starting 9 May via bids and trades. A trade was heard for H1 June at Far East June plus US$8.00/MT (equivalent to US$820.75/MT), along with the first bid General Index heard in two weeks, for H2 June at FEI June plus US$3.50/MT (equivalent to US$816.25/MT).

Another trade was heard 11 May for H2 June at Far East June plus US$6.00/MT (equivalent to US$819.75/MT). Bids had also increased in magnitude and quantity. A bid was heard for H2 June at FEI June plus US$11.00/MT (equivalent to US$830/MT) and a 46,000 MT offer was heard for H2 June at FEI June plus US$10.00/MT (equivalent to US$829/MT).

Looking at the Middle East, Saudi Arabia increased its production by 130,000 b/d to around 10.4mn b/d. Not all 13 members of OPEC are constrained by the group’s quotas policy, but even if we were to take the entire production into account, it has only increased by 153,000 b/d to over 28.6mn b/d. Although many countries are struggling to increase production, the main culprit would have to be Libya, with output dropping by more than 160,000 b/d.

On the other side of the equation, OPEC revised down its worldwide demand estimate, largely due to growing inflation, China’s Covid lockdown restrictions and Russia’s invasion of Ukraine. In its monthly report, OPEC revised down its oil demand growth estimate for 2022 by 310,000 b/d to 3.36mn b/d. This was paired with reduced IEA forecasts released on the same day (down to full-year growth of just 1.8mn b/d), alongside lower propane inventory.

With first half June trading seemingly completed, and plenty of second half June having already traded, it is likely that activity might take a slower pace for the coming week, especially given the Singaporean holiday on 16 May.

Zulfadhli Kader
Chen Ee Woon, Energy Analyst
Zulfadhli Kader
Zulfadhli Kader, Energy Analyst
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