Physical Brent crude fell to its weakest level against futures in about five months, as surplus barrels build in Europe and high freight costs and cheaper Middle Eastern crude curb opportunities to move North Sea supply into Asia.
The physical Brent/Futures spread fell to a $2.12/barrel discount on Nov. 9, according to data from Platts, part of S&P Global Energy, while an unusual number of North Sea cargoes have been left unsold.
Before early July, physical Brent had not traded at such a steep discount to futures since 2022 at the height of the coronavirus pandemic.
It also reflects a collapse since early October, when the Brent/Futures spread was in strong backwardation at over $30/b.
A similar effect was occurring in the Brent prompt structure, with the one-week-ahead Brent CFD crashing by about $32/b since Oct. 7, putting it almost in contango. That reflects weakening prompt Dated Brent versus forward Brent, and therefore a well-supplied market.
In the week ended Nov. 9, the Dated Brent differential — the most competitive among Brent, Forties, Oseberg, Ekofisk, Troll and WTI Midland — sank to its lowest level since 2020.
These spreads have been highly volatile since the start of the US-Iran war in late February, which has roiled crude markets by disrupting flows through the Strait of Hormuz, boosting prices and slashing global inventories, and prompting regular spasms in the futures market on expectations of either peace talks or further escalation.
However, the recent erosion in prompt demand for Dated Brent has been driven mainly by high freight rates, which have constrained the eastward flow of North Sea crudes and WTI Midland
At the same time, competitively priced Middle Eastern barrels — now coming out of the Persian Gulf at greater levels, according to S&P Global Commodities at Sea(opens in a new tab) data — have stifled arbitrage opportunities for North Sea and US crude to clear into Asia.
With reduced Asian demand for WTI Midland crude in recent weeks, more US oil is making its way to Europe, adding to an already well-supplied Northwest European crude market, although traders note that the US can absorb excess barrels.
And an equally well-supplied Mediterranean crude market — flush with cheap CPC Blend from Kazakhstan — is not serving as an outlet for barrels from the Americas, but is rather pushing transatlantic volumes toward the North Sea.
Unsold cargoes
These factors have led North Sea barrels to go without buyers. Platts data shows 31 offers for crudes within the Dated Brent basket left outstanding at the London close across 10 sessions between Oct. 27 and Nov. 9.
On Nov. 9, traders continued to report unsold November-loading North Sea cargoes and scant activity for December-loading cargoes. Among the grades under pressure are Forties and Brent, traders said, with the former traditionally competing with the UAE’s very similar Murban crude.
“People are trying to arb Forties to the East, but Murban is far cheaper, so we wouldn’t be surprised to see it on offer again,” a Europe-based crude trader said.
The differential to Dated Brent Forties collapsed from an almost $20/b premium in mid-October to a $2.77/b discount on Nov. 9, according to Platts, while Johan Sverdrup was assessed at a $4.65/b discount to Dated Brent on Nov. 9, having plummeted since late September. The Norwegian medium sour grade has traditionally been a useful alternative to Gulf crude.
However, traders have taken some bullish sentiment from easing freight rates in recent days, suggesting a rebound in North Sea crude differentials could be in the cards. According to US bank Morgan Stanley, 13 of 27 key tanker rates fell by at least twice their usual weekly move in the week to Nov. 8, which has only happened once since 2021.
Platts assessed freight for a Very Large Crude Carrier from West Africa to the Far East at $141/mt on Nov. 9, down $128/mt month over month, amid a broad correction in the freight market.
“We suspect FOB diffs will rally in the wider market, but more because the costs have gone down than a change in supply-demand [balances],” one North Sea trader said.
