14/05/26
European refiners brace for a new rise in crude diffs
London, 14 May (Argus) — Physical crude differentials in Europe are poised for a
rebound in the coming weeks, traders said, as the effects of recent price
containment measures wear off. Prices for many grades relative to the North Sea
Dated benchmark hit all-time highs in the first half of April, with acute
shortages of crude caused by the effective closure of the strait of Hormuz. Many
grades reached more than $20/bl premiums to Dated, eroding refinery economics.
The situation changed from mid-April, as governments began to introduce price
mitigation measures including drawing down inventories of products and using up
crude from floating storage. Argus' calculations show returns for a northwest
European refinery from running Europe's staple grade US WTI, Norway's medium
sour Johan Sverdrup and Brazilian medium sweet Buzios, all flipped negative in
the first half of April because of record differentials and expensive freight (
see graph ). The calculation uses the value of grades in terms of oil products
that an average refinery can produce, or Refinery Gate Values (RGVs), and
deducts the cost of crude and freight. Only some west African grades, like
Nigerian medium sweet Forcados, remained profitable because of superior product
yields. Refining profits in the Mediterranean region dipped, with running Libyan
Es Sider becoming loss-making, and profits from running Caspian CPC Blend
shrinking. Crude differentials then dropped to near pre-war levels in May, with
two measures notably making a difference, traders said. China reduced imports by
nearly 2mn b/d by cutting runs, using commercial stocks and even reselling some
cargoes back to the spot market, and the US crude stock releases resulted in
around 400,000 b/d of discounted crude from the country heading to Europe for
arrival in May and June. Trader said these two factors have shielded the crude
market from even higher prices and crashed prompt prices. Refinery profits have
bounced back, and although they are $10-15/bl below March record highs, they are
$15-20/bl above January averages for many grades. Now, any prompt excess has
been depleted, and traders said June is going to get tight and prices will climb
again, with some evidence noticeable in cargoes trading further ahead. Far out
prices at premiums Europe's market can be roughly divided into two tiers in
terms of the timing of crude trade — prompt, for loading/delivery 2-4 weeks
ahead, and cargoes due 1-2 months ahead. Prices for the latter are already at
substantial premiums to prompt supplies. Freight-adjusted UK Forties crude,
which typically trades promptly, averaged an almost $9/bl premium to CPC Blend
cif Augusta, which trades a bit further ahead, in the second half of April,
signalling a shortage of prompt supply. But since 5 May, prompt Forties has been
$1.20/bl below CPC Blend. Similarly, WTI for prompt delivery was largely at
parity to supplies arriving more than one month ahead in mid-April, but is now
at a $4/bl discount on average. Traders said crude differentials will be not as
high as they were in April, but said pre-war differentials are unsustainable as
long as Hormuz remains closed. The Dated-to-frontline contracts (DFL) for May
and June, which reflect the strength of physical market relative to the futures
in a given month, also suggest physical prices are likely to increase. The May
DFL fell to $2-$3/bl in early May, but was above $5/bl on 13 May. The June DFL
rose from $4/bl in early May to above $5/bl. For comparison, the front-month DFL
was negative in February, when the European market looked oversupplied, and the
second-month DFL was well below $1/bl in the same period. By Lina Bulyk Med
refinery profits for some grades $/bl NWE refinery profits for some grades $/bl
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