Weaker dis­til­late crack spreads in Europe to pres­sure Nige­rian crude oil grades

Business a.m. - - ENERGY, POWER & RENEWABLES - Busi­ness a.m.

THE DOWN­WARD TRA­JEC­TORY of dis­til­late crack spreads in Europe since midNovem­ber is start­ing to put pres­sure on Nige­rian crude oil grades For­ca­dos and Bonga, traders said.

With the Nige­rian Jan­uary ex­port load­ing pro­grams for For­ca­dos, Bonga and Erha quite large, sources said a slow­down in de­mand for dis­til­late-rich grades will make it dif­fi­cult for crude bar­rels from Nige­ria to clear into Europe.

Crack spread refers to the over­all pric­ing dif­fer­ence be­tween a bar­rel of crude oil and the petroleum prod­ucts re­fined from it. The “crack” be­ing re­ferred to is an in­dus­try term for break­ing apart crude oil into the com­po­nent prod­ucts, in­clud­ing gases like propane, heat­ing fuel, gaso­line, light dis­til­lates like jet fuel, in­ter­me­di­ate dis­til­lates like diesel fuel and heavy dis­til­lates like grease. The price of a bar­rel of crude oil and the var­i­ous prices of the prod­ucts re­fined from it are not al­ways in per­fect syn­chro­niza­tion

“With freight rates still ex­pen­sive for West African (WAF) bar­rels to Europe and large vol­umes of crude avail­able, I ex­pect dif­fer­en­tials on Nige­rian grades to drop,” said a WAF mar­ket par­tic­i­pant.

High vol­umes of crude from Nige­ria cir­cu­lat­ing around Europe are be­gin­ning to lead to a weak­en­ing in de­mand for Jan­uary load­month car­goes, which will put fur­ther pres­sure on crude from the WAF re­gion, sources said.

Across the De­cem­ber trad­ing cy­cle, Nige­rian light sweet grades For­ca­dos and Bonga saw price dif­fer­en­tials rise around 35 cents/b due to strength­en­ing dis­til­late crack spreads in Europe.

This saw the spread be­tween Nige­rian dis­til­la­terich and gaso­line-rich crude widen sig­nif­i­cantly, with the spread be­tween For­ca­dos and Qua Iboe reach­ing 25 cents/b by mid-Novem­ber and the end of the De­cem­ber stem, the widest it has been since June 2015.

Since then the spread has re­mained largely flat, with S&P Global Platts as­sess­ing the spread at the same value Thurs­day, with For­ca­dos and Qua Iboe un­changed on the day at Dated Brent plus $1.40/b and Dated Brent plus $1.15/b re­spec­tively. With de­mand for dis­til­la­terich grades start­ing to be­come more sub­dued, traders said they were now ex­pect­ing the spread be­tween th­ese grades to be­gin to nar­row.

In the ul­tra-low sul­fur diesel com­plex, cash dif­fer­en­tials have weak­ened across the board this week amid ex­pec­ta­tions of health­ier avail­abil­ity of the prod­uct in De­cem­ber thanks to open ar­bi­trage routes from the Per­sian Gulf and the US Gulf Coast.

The al­le­vi­a­tion of tight­ness in the Euro­pean ULSD mar­ket also meant that the phys­i­cal cracks for ULSD were nar­row­ing. The phys­i­cal crack of FOB ARA ULSD barges ver­sus Dated Brent dropped $1.34/b to a one- low of $17.42/b Thurs­day and marked a sharp re­treat from the five-year high of $24.46/b reached Novem­ber 15.

Lower diesel prices also had a knock-on ef­fect on the gasoil mar­ket by re­duc­ing de­mand for desul­fu­r­iza­tion. The desul­fu­r­iza­tion spread -the spread be­tween 10 ppm diesel CIF Med car­goes and 0.1% gasoil CIF Med car­goes -- nar­rowed to $4/mt Thurs­day from $8.50/mt Wed­nes­day, hav­ing traded above $6.50/mt since July 2.

“At present the dif­fer­ence be­tween 0.1% and 10 ppm is not big enough [to prompt desul­fu­r­iza­tion de­mand],” one trader ac­tive in the Mediter­ranean said. “0.1% needs to come off.”

Lower desul­fu­r­iza­tion de­mand added to a lack­lus­ter de­mand en­vi­ron­ment in the Euro­pean gasoil com­plex. De­mand for gasoil was still slow to pick up, one trader ac­tive in Switzer­land said Thurs­day, “de­spite large falls in out­right prices [for gasoil].”

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