Deliveries of key US crude WTI to Europe are poised to fall in September, potentially supporting prices for regional grades, says an article published on their website.
Record WTI imports
WTI shipments to Europe hit a record 1.8mn b/d in July and are on track to exceed this in August — preliminary data from tracking and analytics firm Vortexa suggest August arrivals could surpass 1.9mn b/d.
But a streak of record WTI imports is expected to come to an end next month as arrivals tighten, particularly in the first half of that month, market participants say.
Higher WTI shipments destined for the Asia-Pacific market are partly behind the expected decline next month. Asia-Pacific refiners have bought more WTI cargoes loading in September, most likely in reaction to higher prices for sour Abu Dhabi grade Murban.
Saudi Arabia’s decision to extend its unilateral production cuts into September has boosted competition for alternative Mideast Gulf supplies, including Murban. The higher Asia-Pacific demand has essentially reduced the amount of WTI available to European buyers, while the arbitrage to ship US crude to Europe has also been less favourable in recent weeks, according to market participants.
Another factor behind the drop in WTI imports — in early September, at least — is the impact of market structure in sellers’ decisions on which crudes to supply to meet North Sea forward crude commitments. Forward crude markets have become steeply backwardated, whereby prompt values hold firm premiums to forward prices. In the North Sea, sellers have less incentive to deliver cargoes in early September to settle forward market commitments.
Contract for difference (CfD) markets show early-September cargo values averaging 70¢/bl above the market for the end of that month. Typically, delivering true North Sea cargoes into forward chains has been restricted by their loading dates. But WTI has no loading schedules, meaning sellers can withhold deliveries until later in the month if it lowers the value of what they need to source.
The extent to which WTI shipments to Europe could drop is difficult to gauge. Tracking data have yet to provide a clear picture of September arrivals. But the anticipated decline is expected to provide some support to North Sea prices.
WTI imports have been capping prices for light sweet grades in northwest Europe since US arrivals in the region surged in March. If WTI flows to Europe fall and its value increases, this would boost demand for local grades of a similar quality.
Other benchmark grades
The drop in the amount of WTI in the region could also buoy the value of Atlantic basin benchmark North Sea Dated.
WTI has set the price of North Sea Dated in 40 of the 78 sessions since it became the sixth grade in the basket of crudes underpinning the marker, as the cheapest of those grades. If WTI’s value increases and the other benchmark grades follow suit, the price of North Sea Dated would also move up.
Regional sour crudes
Reduced WTI flows to Europe would also support heavier North Sea grades, including Norwegian medium sour Johan Sverdrup. The easy availability of cheaper WTI cargoes prompted European refiners to switch to a sweeter feedstock slate this summer, hitting demand for regional sour crudes ― Johan Sverdrup lost more than $3/bl relative to North Sea Dated over the course of about a month. But this dynamic is expected to reverse in September.
Higher imports from other regions, such as west Africa, could partially offset the decline in WTI arrivals, market participants say. West African crude — Nigerian light and medium grades, in particular — has enjoyed firm demand from European buyers in the past few weeks.
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