Dubai strength and US tariff qualms make TMX Asia's favourite heavy grade

Americas:

• Bullish US Gulf Coast offshore grades as PADD 5 gradually return from maintenance next month, further buoyed by stronger mid-distillate cracks and tariff woes
• Bearish Brazilian medium sour differentials even as higher supply levels are partially offset by the end of winter turnarounds and Tupi field maintenance over the upcoming 4-5 weeks
• Bullish on TMX flows to China as the ICE Brent peg of Canadian barrels makes them the most competitive heavy sours, with Japan resuming low-TAN imports, too

Atlantic Basin:

• Bearish on Norwegian crude supply as power outages keep a lid on medium density crudes from the country.
• Bearish on light sweet crude differentials as European imports of lighter grades are hovering around multi-month highs
• Bullish-neutral on medium density crude differentials as supply outages, lower European imports (of heavier grades), and robust middle distillate cracks are expected to offset the downside coming from seasonally decline crude demand

Middle East and Asia

• Bearish on WTI prices in Asia, as Chinese refiners may look to resell their U.S. cargoes that have not been granted tariff waivers by Beijing.
• Bearish on the Dubai structure, as Asian refiners are expected to reduce spot purchases at current high prices, while the narrowed Brent/Dubai spread creates an arbitrage opportunity.
• Bearish on Russian crude exports to India, as the South Asian country signals its intent to reject cargoes supplied by sanctioned companies and tankers.

Americas: TMX is Asia’s new favourite heavy sour, for all the wrong reasons

Backwardation in WTI futures has swung from unprecedentedly steep backwardation a month ago to barely seeing any backwardation along the curve, with the US light sweet benchmark’s M1-M2 spread falling below $0.10/bbl by February 13. Despite the ever-shifting Trump effect on oil prices, there seems to be relatively little market interest in taking up new long positions in WTI, with hedge funds cutting their net length in WTI by a whopping 110 Mmbbls over the past two weeks. Bearish bets are concurrently on the rise, with hedge funds and other managers now wielding 57 MMbbls of short positions, the highest level since early December 2024. As US crude inventories gradually recover, pricing discrepancies between different regions have come to the forefront. Aided by strengthening diesel cracks in the US Gulf Coast, rebounding to a 4-week high of $23-24/bbl, differentials of medium sour Mars to front-month WTI widened to a $1.5/bbl premium, the highest since mid-December 2024. Most of offshore grades’ gains stem from a widening spread between port-delivered FOB prices in Houston and inland WTI prices, as the Mars-WTI Houston spread has been remarkably stagnant across February, averaging a slight $0.20/bbl premium for the light benchmark. For reference, the lighter 34° API Light Louisiana Sweet grade saw its premium to WTI rise to $3.5/bbl.

Mars differentials vs front-month WTI futures, $/bbl.

Source: Argus Media.

Recovering from a year of failed expectations that saw annual production decline by 55 kbd y/y (equivalent 1.6%), Brazil now hopes to regain its lost mojo in 2025. Barring Buzios and Mero, almost every single major Brazilian field has witnessed y/y declines in 2024, spearheaded by Tupi’s 52 kbd y/y drop to 779 kbd. The much-expected recovery will be slow to surface in Q1 2025, with Tupi production hampered by two separate FPSO repair works in February-March and smaller streams such as Iracema also seeing field maintenance. Mero has been the unsung hero of Brazil’s upstream segment lately, with the October launch of the Mero-3 FPSO lifting total production capacity to 590 kbd. Output almost doubled y/y by late 2024, seeing production levels of 420-430 kbd, with further upside expected once the fourth platform is commissioned later this year and takes operational capacity to 770 kbd. More Mero volumes coming out of Brazil represents a potential boon for European refiners – the usual buyers of the 29° API grade – as differentials are long overdue a downward correction. Brazil’s main Europe-bound export grade Buzios has been incrementally climbing for the past month and is now traded at an almost $3/bbl premium vs Dated, equivalent to a $2/bbl gain since the beginning of 2025. Slightly offsetting the higher upstream volumes, there would be absolutely no refinery maintenance happening in March-April, with the Abreu e Lima refinery coming back to full capacity in the first decade of March.

Tupi and Buzios monthly production, kbd.

Source: Kpler, based on ANP data.

As Dubai front-month futures still trade at a $2-3/bbl premium over equivalent ICE Brent futures, any grades that are historically pegged to Brent pricing but tend to trade into Asian markets have received a notable demand boost. TMX is certainly one of those, with Japan’s ENEOS resuming purchases of low-TAN Canadian barrels after a test purchase last year. The April loading programme was sealed with AWB prices around -$8.5 to -$9/bbl on a FOB Vancouver basis, equivalent to a -$6/bbl discount vs ICE Brent M3 when delivered to China. With ICE Brent already lagging behind Dubai, this constellation effectively makes high-TAN TMX cargoes a hefty 4/bbl cheaper than Basrah Heavy and even cheaper than Mexican Maya (a standoff that TMX was losing for most of Q4 2024). Over time, the Chinese market is becoming increasingly important for TMX exporters, largely because it doesn’t trigger any geopolitical risks. The Vancouver-Los Angeles freight costs have been rising ever since Donald Trump confirmed his readiness to slap tariffs on Canadian oil, with a WS200 rate (some $2.5/bbl in barrel terms) marking the highest Aframax rate since the pipeline expansion was commissioned last year. Bringing good news for TMX term allocation holders, the Hardisty netbacks of US-bound pipeline deliveries have greatly suffered from the unpredictability of Trump policy, heralding in a new era when TMX cargoes see marginally better Alberta netbacks of -$13 to -$14/bbl vs WTI.

Landed prices of selected heavy grades vs Dubai, $/bbl.

Source: Kpler, based on Argus Media data.

Atlantic Basin: Supply outages, refinery maintenance, and robust middle distillate cracks are reshaping European markets

February has been a tough month for Norway’s state-controlled Equinor, as power outages temporarily halted production at several crude fields this month, including Johan Sverdrup, Gina Krog, Ivar Aasen, Edvard Grieg, and Gudrun. The most recent disruption this week stemmed from an incident at a converter station in Haugsneset near Karsto, which marked the second outage in February. While production has since recovered, we estimate these outages will cap Norway’s crude and condensate supply this month, prompting a downward revision of around 50 kbd (versus our previous estimates) to a two-month low of 1.8 Mbd in February. Despite these outages, Equinor does not anticipate changes to its loading schedule, which is expected to average 716 kbd in February and March. Looking ahead, departures should continue rising through Q2 and beyond as the delayed Johan Castberg field—originally slated for Q4 2024—ramps up production.

Norwegian crude and condensate supply, Mbd

Source: NPD

Seasonally declining European crude demand, combined with strong crude arrivals, has kept regional market structures under pressure, with BFOET crude differentials remaining on a slight downward trend since mid-January. Forties crude differentials have dropped from a nearly $1/bbl premium over North Sea Dated in mid-January to a slight deficit. European crude demand is expected to decline from 12.1-12.2 Mbd currently to 11.7 Mbd next month, driven by seasonal refinery maintenance, which will keep around 1.7 Mbd of primary distillation capacity offline in March, up from 900 kbd in February (IIR). Meanwhile, European crude imports have been rising, reaching a four-month high of 11 Mbd in January, with robust inflows continuing this month. As imports strengthen, crude availability will increase, replenishing lower European inventories (currently at 333 Mbbls, down 20 Mbbls from June 2024 levels) and keeping regional crude differentials subdued over the remainder of Q1.  

European crude imports by destination, Mbd

Source: Kpler

In terms on quality, the increase in European crude imports has favoured light sweet grades, which averaged 5.2 Mbd in December and January. This increase may also explain some of the weakness observed for regional light sweet grades, as discussed above. Interestingly, imports of medium to heavy grades have been falling steadily over the same period, with European medium sour imports coming in at less than 2.2 Mbd in January (although December did come in stronger at almost 2.4 Mbd), which represents the lowest level in over a year. The decline in arrivals of heavier grades, coupled with Norwegian supply outages, and a recent increase in middle distillate cracks in Europe have provided support for medium density grades such as Johan Sverdrup, with its differentials trading at steeper premium territory versus North Sea Dated over the past weeks. The latter factors may keep regional medium density grades supported in the weeks ahead, largely offsetting any downside that may come from a decline in crude demand in March.

Regional sweet-sour spreads, $/bbl

Source: Argus Media

Middle East and Asia: China’s 10% tariffs on US crude kick in, with no waivers granted yet

The first shipment of U.S. crude since Beijing imposed an additional 10% tariff on American oil imports arrived at the southern Chinese port of Zhanjiang on Wednesday. China announced a series of countermeasures in response to the blanket tariffs imposed by Washington on Chinese goods, set to take effect on February 10. Reuters reported last week that traders were likely to seek waivers from Beijing to avoid the levies. However, several market insiders told Kpler that customs authorities have informed oil buyers that the 10% tariff applies to all U.S. cargoes if their customs clearance submission occurs after February 10. As of the time of writing, no waivers have been reported granted.

Two tankers, Sea Lion and Sonangol Huila, are scheduled to discharge a total of 3.08 Mbbls of U.S. crude at China’s Zhanjiang and Zhoushan ports this week. Looking ahead, 10.51 Mbbls of U.S. crude, primarily light sweet grades, are set to reach China in March, with at least 7.42 Mbbls expected to arrive in April. At current prices, Chinese buyers will have to pay an additional $8/bbl for WTI crude due to tariffs, making it less competitive than alternatives like Abu Dhabi’s Murban and Kazakhstan’s CPC Blend. However, for other Asian countries that do not impose tariffs on U.S. crude, WTI is now priced nearly $2/bbl lower than Murban on a delivery basis, enhancing its appeal in those markets. Japan’s Idemitsu Kosan has reportedly taken a rare cargo of WTI for May arrival, along with other Japanese and Thai firms. Depending on how long Beijing maintains the tariffs on U.S. crude, Chinese buyers—primarily state-owned refiners—are likely to resell some of their upcoming shipments.

China's seaborne crude/co imports by origin, %

Source: Kpler

China is expected to receive around 1.32 Mbd of Saudi crude oil loading in March, marking a 15% drop from February’s levels. High oil prices and heavy spring refining maintenance have dampened demand. Last week, state oil giant Saudi Aramco raised OSPs across the board, pushing the price of its flagship Arab Light crude to Asian customers to its highest point since December 2022. China’s top refiner, Sinopec, is reportedly set to receive fewer volumes as at least six of its refineries, with a combined refining capacity of over 1 Mbd, are scheduled for maintenance by the time these cargoes arrive in April. Meanwhile, PetroChina, which has less intensive refining scheduled for the month, is expected to take in more Saudi cargoes.

A buying frenzy from Chinese and Indian refiners, driven by the need to secure substitute cargoes for Russian crude after the US sanctions in January, fueled spot Middle Eastern crude trades and strengthened the Dubai benchmark. Now that Russian crude outflows seem more resilient than initially expected, and with the narrowed Brent-Dubai spread creating opportunities to buy arbitrage cargoes from the Atlantic Basin, the Dubai backwardation has softened in February, ensuring a downward adjustment of Saudi OSPs next month.

Arab Light crude OSPs, $/bbl; Saudi crude exports to China, Mbbls

Source: Saudi Aramco, Kpler

India is strengthening its energy ties with Brazil by signing a crude import deal with Petrobras and partnering with the Brazilian state-controlled firm on offshore oil and gas exploration. The South Asian nation has been striving to diversify its crude oil imports, which account for around 85% of its feedstock demand. As U.S. sanctions on Russian oil trade tighten, securing supplies from countries with lower geopolitical risks has become increasingly urgent. This week, Bharat Petroleum Corp finalized an optional term contract to purchase up to 6 Mbbls of Brazilian crude for delivery in 2025-2026. The state-owned refiner operates three refineries in India, with a combined capacity of 708 kbd. Last year, India imported 17.22 Mbbls of Brazilian crude, down 1.68 Mbbls year-on-year, with the bulk brought in by Reliance, IOC, and ONGC.

Meanwhile, the share of Russian crude in India’s total imports has been declining, from 41% in September 2024 to 33% last month. India’s oil secretary stated on Thursday that the country will only purchase Russian oil supplied by companies and vessels that are not sanctioned by the U.S. So far, all Russian crude shipments discharged in India have complied with U.S. sanctions on tanker carriers. However, the sanctioned tanker Leo, carrying 1 Mbbls of Novy Port crude, appears to be heading to India, while Pavel Chernysh, which loaded 700 kb of Sokol on January 11, is also bound for India. The final destinations of the tankers may change if India maintains its firm stance on rejecting cargoes that breach U.S. sanctions.

India’s crude/co imports by origin, kbd

Source: Kpler

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