European end-users are looking toward WTI Midland to fill their light sweet crude requirements despite the backwardated market structure amid limited North Sea crude availability, traders said.
“Europe has been paying strong numbers to pull the barrels over,” one trader said, adding that bids for prompt barrels have been above $4/b premiums to March Dated but market participants have so far been unwilling to release barrels into those bids “given the lack of alternatives.”
The European light sweet crude market was considered tight by many market participants.
“Most of North Sea sweet [cargoes] have already traded for March [loading], shorter haul barrels [are] valuable versus longer haul with steep backwardation,” a second trader said.
In a steeply backwardated market combined with strong offer levels, buying interest for grades like WTI Midland from European buyers would typically falter.
Backwardation is particularly painful for sellers of long-haul crude grades as the relatively long sailing time to buyers carries with it the cost of that Brent structure.
The market has had to contend with record-breaking backwardation in physical Brent, with a financially calculated Dated Brent forward curve showing nearly $3/b separating balance month February and March contracts, S&P Global Platts data showed.
Strong WTI Midland levels
“WTI is extremely tight in the US and inventories are very low,” the first trader added, giving the reason behind the high offer levels for March and April arrival barrels.
US crude inventories shrank by 1.05 million barrels to 415.14 million barrels for the week ended Jan. 28, according to the most recent data from the Energy Information Administration. While it was a lower-than-expected draw, it still put inventories 8.5% below the five-year average.
While some traders have suggested the market structure, crude spreads and the tight market could result in US sellers wanting to hold barrels from the export market to sell into the local market, many others expect large volumes of the US grade to continue to flow into Europe.
“Even with how tight and expensive US crude is, Europe [buyers] will pay it quite happily, so I’d expect top end of normal volumes [to arrive in March] — 1.3 million b/d type numbers,” a trader said.
Other light sweet crude alternatives include those from West Africa, though demand for these grades can also suffer amid a backwardated market structure, often putting them in direct competition with WTI Midland.
With a comparable sailing time of a bit over two weeks from the US Gulf Coast to Europe or from Nigeria to Europe, sellers of crudes from both regions have been feeling the pressure of backwardation when competing with local alternatives.
“Backwardation is a major, major factor at present and I suspect the European refiners who come [to] the market later/prompter in the trading cycle and have short-haul alternatives, will struggle to see the same kind value as Eastern buyers have been seeing,” one trader of Nigerian crude said.
Whether or not European refiners opt for WTI Midland or Nigerian light sweets, traders of West African crude were unanimous in saying that offers for prompt-loading Nigerian barrels would have to be lowered in order to sell into the region.
“We see WTI at the high [$]3 [differential] in March as more competitive than WAF,” the first trader said.
Source: Hellenic Shipping News