European markets are finally showing signs of physical tightness, in line with our expectations of July-August showing a negative global crude balance of approximately 2.5 Mbd. Backwardation in ICE Brent futures steepened to such an extent that the M1-M2 spread soared to $1.2/bbl, the highest mid-month reading since October 2023. The Dated-to-Frontline spread rose above $1/bbl over the past week, with Brent CFDs firmly backwardated, seeing a robust $0.30/bbl between respective weeks all the way through. Even though Dubai has been recovering from a month of notable malaise in June, the Brent-Dubai EFS spread keeps on widening, too, reaching $2.4/bbl at the time of writing, narrowing down whatever little arbitrage opportunity there was for European grades to move into towards the Asian continent.  

Brent CFDs vs prompt-month ICE Brent by week, $/bbl.

Source: Argus Media

In Central Europe, the largest disruption to crude flows has been coming from Druzhba pipeline deliveries. Ukraine’s President Zelensky signed decree 376/2024 on 24 June that effectively extended the Russia sanctions to privately-held Lukoil and its subsidiaries, disallowing the country’s pipeline operator Ukrtransnafta from approving pipeline allocations from the largest pipeline supplier of Slovakia and Hungary. This placed some 45% of Slovakia’s pipeline crude supply in jeopardy, with approximately 35% of Hungary’s pipeline deliveries also coming from Russia’s largest private producer. Aggravating the tense situation, both Hungary and Slovakia nominated ample volumes of crude as both were ramping up operations after spring maintenance (Bratislava’s AVD6 distillation column came back in early July after extended debottlenecking repair works that ironically were meant to render the refinery’s crude intake more flexible).  

Pipeline deliveries via the Druzhba system by destination country, kbd.

Source: Kpler.

Hungary’s 125 kbd pipeline supply would have meant a six-month high in Druzhba deliveries, however with Lukoil effectively no longer being able to transport crude via Ukraine, July would most probably result in an underperformance. The biggest supply risks are currently with Slovakia where most of Lukoil volumes was directed towards. It is unlikely that the current standoff, which has already escalated to the political level, will lead to long-term ramifications (Ukraine seems to not mind Rosneft’s volumes en route to the Czech Republic or traders’ volumes to the same Hungary and Slovakia), most probably the same volumes would be sleeved through Ukraine via trading companies. The potential renegotiation or amendment of long-term supply contracts will, however, take time and perhaps even barrels nominated for August delivery could be lower than assumed.

In other news, Kazakhstan’s flagship grade CPC Blend has seen several weeks of continuous strength, with CIF Augusta differentials soaring to the highest in two years. Whilst part of pricing improvements seen across June were coming from collapsing freight rates – the per-barrel cost of delivering an Aframax cargo to the central Mediterranean dropped from $3.1-3.2/bbl in early June to $2/bbl by the end of last month – there hasn’t been any notable shift in freight costs in July so far. As the current CPC trading cycle has been focusing on cargoes loading mid-August, when the impact of the 45-day field maintenance at the giant Tengiz field will be felt already. Up until now, Tengiz has been very consistent in its performance despite Kazakhstan’s promises to curb its OPEC+ overproduction – the June production rate stood at 632 kbd, only marginally below the 2024 average output to date. Amidst limited availability, sellers’ willingness to offer cargoes to the markets has been very tepid amidst healthy demand, suggesting that more trades could follow over the next two weeks as prices have hit the sweet spot when it makes sense to show them to the market.  

CPC Blend differentials basis FOB Yuzhnaya Ozereevka vs Dated, $/bbl.

Source: Argus Media.

Whilst Kazakhstan’s production is still yet to decline beyond seasonal field maintenance works, its Caspian peer Azerbaijan is struggling to lift crude output rates despite the oft-mulled uplift from the new BP-operated 100 kbd Azeri Central East platform. The first half of 2024 has so far been a disappointment for Azeri producers. First, average crude and condensate production came in at 592 kbd, some 30 kbd lower compared to H1 2023. Second, structural decline rates at the Azeri-Chirag-Guneshli (ACG) field are so far overpowering new producing wells from ACE, with ACG posting a hefty 10% y/y decline to 340 kbd. All this is taking place amidst a slight uptick in condensate production as the first phase of Absheron has added lighter barrels to Azerbaijan’s overall portfolio. BTC Blend differentials have benefited from lower supply rates, with the shorter August loading schedule adding further upside to prices (27 cargoes averaging 572 kbd, down 8% compared to July). Consequently, FOB Ceyhan differentials of the ever-lighter BTC gained more than $1/bbl since the beginning of this month and moved up to a premium of $2.5/bbl vs Dated.  

‍

^{Did you know?}‍

Our analysts share this type of research on a daily basis via Kpler’s Insight service.

Through unbiased, expert-driven research and news, you’ll receive valuable information on supply, demand, and market movements, enabling you to make informed trading and risk management decisions.

If you haven't explored the service yet or would like to dive deeper into data from this report you can book a demo here.

‍