Flattening futures curves set to lead to OSP cuts in the months ahead

Atlantic Basin:

• US waterborne crude imports are gradually rising for a fourth consecutive year as refinery runs climb higher
• Colombian and Venezuelan imports are stepping up to fill the gap left by Mexico on the US Gulf Coast
• The first cargo of Ecuadorian crude has discharged on the US Gulf Coast in three years as ramifications of TMX cause a ripple effect

Europe and FSU:

• Higher gasoline production from Nigeria pressures buying of European barrels significantly
• Return of Libyan crude production to full volumes in November should drive exports 20% higher m/m
• Higher light sweet crude availability in the Med pressures CPC Blend and Azeri BTC differentials over October

Middle East and Asia:

• Improving product cracks in Asia have limited the downside for Middle Eastern OSP changes into December, with Saudi Aramco cutting formula prices by $0.40-0.50/bbl compared to November
• Flattening futures curves and the prospect of post-maintenance refinery supply recovery are set to bring about another OSP cut next month, with formula prices set to dip in January 2025, too
• California's downstream woes are limiting the future prospect pool of TMX buyers, making Canada's dependence on Chinese refiners even more palpable next year

Atlantic Basin: Evidence of TMX impact seen via Ecuadorian crude delivery to US Gulf

We discussed last week how US crude exports this year are treading water versus 2023’s pace, hovering around 4 Mbd, despite domestic production averaging 300 kbd higher this year—meaning that every incremental barrel of production is not being exported. One explanation for this could be stronger refining activity, given that higher US refinery runs y/y are also resulting in rising US waterborne imports for a fourth consecutive year.

Granted, this increase in waterborne imports is only marginal, ~40 kbd y/y, but imports have gradually been rising on an annual basis so far this decade after they dropped to the lowest on our records in Covid-crippled 2020. But the source of these imports has been evolving.

US waterborne crude imports by origin region, kbd

Source: Kpler

Unsurprisingly, flows from the Middle East have been subdued since the end of last decade, given both the rise in domestic US production and the agenda of Middle East OPEC members to price their crude so high as to deter US buyers. The US is the largest, most timely and most transparent market in the world; hence, throttling back on deliveries helps keep US inventories in check and supports prices, while Middle East OPEC members favour sending their crude to more opaque destinations such as the demand hub of Asia. So far this year, Saudi flows have dropped to their lowest annual pace on our records as deliveries are mostly limited to equity barrels to Motiva Port Arthur along with parcels from these VLCCs shuttling up the East Coast to PBF Paulsboro, as well as consistent deliveries to Chevron’s Richmond terminal on the US West Coast. To put this drop in context, US imports of Saudi crude were nearly 900 kbd in 2018, but are pacing at less than a third of this in 2024. Iraqi crude deliveries this year have also been throttled back, with destinations mostly whittled down to just two on the US West Coast: Chevron Richmond and Marathon LA. With West Coast Canadian crude exports from TMX ramping up, Iraqi barrels may get squeezed out once long-term contracts expire. One increase in a sea of descending Middle East volumes to the US has come via the UAE, with higher light sour Murban crude flows, tripling this year but still at a modest 30 kbd. All these barrels have headed to Chevron Richmond (a recurring theme), the result of a 25% increase in total Murban crude exports as the UAE has pivoted to run medium sour Zakum through its own refineries instead.  

Countering the weakness in Middle East flows, Latin American barrels have rebounded from a low of 1.2 Mbd in 2021 to hold at 1.6 Mbd over the last two years, accounting for nearly 60% of total US waterborne imports. This comes despite deliveries from Mexico dropping by 260 kbd y/y (or 35%) to 485 kbd this year, as Venezuelan crude imports have climbed 90 kbd (or 70%) to 230 kbd, Guyana by 60 kbd (or 80%) to 130 kbd with lesser increases from Colombia, Brazil and Argentina. Both PADDs 1 and 3 have predominantly replaced the loss of Mexican crude with Venezuelan and Colombian barrels, while PADD 5 has leaned more heavily on Brazilian and Guyanese barrels. The difference for PADD 5 has been that these Latin American barrels have stepped up to replace the loss of Saudi crude deliveries rather than Mexican crude.

PADD 1 remains little changed in terms of flows except for the Mexican crude substitution – light sweet Atlantic Basin barrels continue to flow from the likes of North and West Africa – both directly and via transshipments from Point Tupper in Canada. As for PADD 3, Latin American barrels continue to dominate, accounting for over three-quarters of imports. As for PADD 5, while Latin American flows continue to tick higher – currently up 10% versus last year at 570 kbd, the strongest annual pace on our records – it is Middle Eastern flows which are dropping (the abovementioned pullback from Saudi) as the ramp-up of the Transmountain (TMX) pipeline expansion has rapidly bolstered Canadian volumes into the US West Coast.

US West Coast crude imports by origin region, %

Source: Kpler

While Middle Eastern barrels are getting backed out of PADD 5, Latin American producers are also feeling the brunt of TMX. Ecuador was one of the expected countries to get pushed out because of TMX, and this is starting to happen: deliveries have dropped below 100 kbd for the first year on our records, making up just 10% of deliveries to PADD 5 this year after being close to double that share early this decade. But these changes bring opportunity: with Mexican flows dropping into PADD 3, Ecuadorian crude may have a market to pivot to, and this has manifested in recent days. A cargo of 718 kb of Oriente was discharged at Citgo’s Corpus refinery this week, the first delivery of Ecuadorian crude to the US Gulf Coast in three years and the first of Oriente since January 2020.

Europe and FSU: European gasoline exports to Nigeria drop to 4-year lows

European gasoline barrels will need to look for new buyers soon

Over the course of October, European gasoline exports to Nigeria dropped to their lowest levels in over four years at 100 kbd, 140 kbd lower y/y. Motorfuel flows to the West African country have already been in decline since H2 2023, a result of the government’s removal of fuel subsidies, tripling prices at the pump and high levels of inflation. However, the most recent decline in flows is a direct consequence of first gasoline barrels produced at the Dangote refinery. We estimate that gasoline production at the plant is currently trending around 75 kbd and domestic sales have started last month, with the Sabaek vessel loading 500 kbd of gasoline on 15 October and arriving at Tincan Island (Nigeria) on 16 October. We project that due to Dangote, West Africa’s gasoline production could potentially rise to 170 kbd in 2025 and above 200 kbd in 2026. As a result, West African gasoline balances could lengthen from a deficit of -500 kbd in 2024 to -300 kbd in 2026, shrinking the WAF market for gasoline imports considerably. Since early 2023, Belgium has overtaken the Netherlands as the main gasoline supplier to Nigeria. This came as in August 2022, the Netherlands introduced a sulphur cap on fuel exports (max. 50 ppm), squeezing Netherlands-Nigeria gasoline flows from 110 kbd in 2022 to 60 kbd in 2023 and 25 kbd in 2024 so far. In the meantime, Belgium’s share in Nigeria’s gasoline import mix has risen from 30% in 2022 to 45% in 2024. Still, it should be noted that in September 2024 a Belgian legislation came into effect also tightening the permitted sulphur content of road fuel exports to 50 ppm (3 times stricter than the Nigerian limit). This development combined with increasingly higher output coming out of Dangote will result in lower gasoline imports to Nigeria. Hence, major European gasoline sellers such as Belgium will need to look for new outlets soon.

European gasoline exports to Nigeria, kbd

Source: Kpler

Libyan oil exports to rise by 20% m/m in November

As reported by us, the most recent dispute between Libya’s rival eastern and western factions pressured the country’s oil production by from usual levels of 1.2 Mbd to volumes of 880 kbd in August and 660 kbd in September. While August’s crude exports still held onto normal levels of 1 Mbd due to stock draws, September’s exports fell to 4-year lows of 450 kbd, with Libyan crude inventories also dropping to multi-year lows of 22 Mbbls in that month. However, in early October, the country’s eastern government lifted the force majeure after UN-facilitated talks resulted in the nomination of a new central bank governor. We estimate that Libyan crude supply therefore recovered to a monthly average of 950 kbd in October and should further rise to usual volumes of 1.15 Mbd in November. With some 100-120 kbd typically going to domestic refineries (120 kbd Zawia refinery), crude exports trended at 850 kbd in October, still 20% below usual levels. Hence, with output recovering fully in November at 1.2 Mbd, exports should also jump to 1 Mbd.

Libya crude supply outlook, kbd

Source: Kpler

Rising European refinery runs support CPC Blend spot differentials

The Libyan outage and the resulting squeeze of light sweet crude availability was mostly felt by the largest European buyers of these grades: Italy, Spain, Greece, France, with Libyan departures to these countries combined falling by 60% m/m in September. As European buying shifted to substitute grades, spot differentials for CPC Blend and Azeri BTC strengthened by $1/bbl and $0.40/bbl m/m in September. After the Libyan supply return in October weighed on crude valuations in the Med, with CPC Blend diffs falling by $1.25/bbl m/m in October, the grade’s valuations have risen over the past two weeks, moving from -$5.8/bbl vs Dated in late October to -$4.5/bbl currently. This is in line with European crude demand rising over November and December, to 12.28 Mbd (+780 kbd m/m) and 12.85 Mbd, a dynamic that should continue to support Med grades for the rest of November.

Selected Med light diffs, $/bbl

Source: Kpler

Middle East and Asia: Despite improving refinery margins, Saudi Arabia cuts December OSPs on flattening Dubai futures

The news of President Trump’s victory at the US presidential ballot have triggered a somewhat muted response across the Middle East and Asia, with most preferring a ‘wait-and-see’ tactic to gauge the impact of the next administration. Following weeks and months of Dubai futures seeing notably steeper backwardation, the M1-M3 spread in all three key regional benchmarks (Brent, WTI and Dubai) is now almost identical, hovering around $0.70-0.80/bbl. Such flattening of Dubai futures also sets the stage for yet another OSP cut in January 2025, building on the downward pricing trend we have seen over the past months.

Dubai time spreads, $/bbl.

Source: Argus Media.

Just as we have predicted, Saudi Aramco cut Asia-bound formula prices for December-loading cargoes by $0.40-0.50/bbl, with the heavier barrels of Arab Medium/Arab Heavy seeing the smaller m/m cuts. Such a price move is a fair representation of October changes in Asia’s pricing and balances, reflecting the $0.41/bbl m/m change in the Dubai M1-M3 time spread as well as the constructive picture on almost every single product category. In stark contrast to Europe, the Asian gasoline crack is holding up quite nicely around $11-12/bbl mark without no evident downward movement, whilst both the middle and heavy distillates strengthened notably over the course of October. There are rumours circulating of Arab Heavy and Arab Medium availability being curtailed in November-December on field maintenance, however, we believe the impact arising therefrom would be limited. Crude burn is gradually declining across Saudi Arabia, freeing up barrels that naturally fit into Arab Heavy. Moreover, if the supply impact would be as high as it is often insinuated, then the $0.40/bbl m/m cut into December seems to be a very timid move.

Saudi Arabia's Asian formula prices vs Oman/Dubai, $/bbl.

Source: Saudi Aramco.

Interestingly, the Saudi national oil company has also curbed formula prices for its December loadings en route to the United States. Arab Light, by far the most popular grade when it comes to US-bound exports, has been lowered by $0.10/bbl, with the December OSP now coming in at a $3.8/bbl premium to the Argus Sour Crude Index. The heavier grades – again Arab Medium and Arab Heavy – were cut by $0.30/bbl, but their exports to the US is more an academic exercise than a steady flow. For many months, the American differentials of Saudi grades were prohibitively high but recently, lower prices triggered marginally higher exports. Saudi Arabia’s 2024 average outflows to the American continent have averaged 297 kbd to date, yet another 100 kbd y/y drop, however September outflows were much higher than the past months’ average. Concurrently, Iraqi flows to PADD 5 have been defying erstwhile concerns that the launch of TMX exports would dramatically undercut their viability. In October, Iraqi flows of Basrah Medium to California’s refineries rose to 220 kbd, up 30 kbd compared to September volumes, with six tankers currently sailing to PADD 5.

Arab Extra Light-Arab Heavy spread, $/bbl.

Source: Saudi Aramco.

Canada’s Trans Mountain Pipeline has seen a whirlwind of news lately. Arguably the most important news for corporate interests is CNRL’s takeover of PetroChina’s 75 kbd term commitment, coming into effect from December 2024 onwards. This move would minimize China’s direct involvement in the pipeline and take Canada’s largest oil producer to a total of 169 kbd take-or-pay volume locked in in TMX, controlling 35% of all allocated capacity. Simultaneously, exports out of Westridge soared to new record highs in October, averaging 430 kbd and posting an impressive 100 kbd m/m increase, with China overtaking the United States as the main destination country for the first time since June.

Landed prices of heavy sour grades into Northeast China vs Dubai, $/bbl.

Source: Kpler, based on Argus Media.

China will increasingly become the key market for Canadian volumes, particularly as TMX shippers ramp up volumes in 2025, considering that one of the key PADD 5 buyers of late, Phillips66’s 140 kbd Los Angeles refinery is slated for a shutdown late next year. As the LA refinery was running on 25-30% Canadian crudes (initially being configured to run on regional heavy sour Californian grades), buying into the Los Angeles area would inevitably subside after 2025. Moreover, recent announcements from regional refiners – specifically that PBF Energy signalled November maintenance at its Torrance refinery on equipment used to remove impurities. This would lower the West Coast refiner’s TMX intake from roughly 50 kbd to just 20 kbd over the upcoming weeks, releasing even more crude to potential Chinese buyers. Needless to say, PBF’s lower intake of 24 API Oriente and higher imports of TMX barrels might necessitate a more frequent maintenance schedule, specifically on the coking units to mitigate the acidity impact of Canadian crude.

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