Oil market sentiment weak across the board

Atlantic Basin: The outlook for US medium sour crude markets will remain weak over Q4, despite hurricane-related supply outages in the US Gulf this week, with a relatively elevated US crude balance expected to keep crude availability robust and regional prices pressured.

Europe and FSU: Libyan oil exports remain significantly disrupted, but in the past week, several tankers managed to load from key ports, signalling some easing of supply constraints. However, this recent activity, coupled with weaker gasoline cracks, has begun to pressure light sweet crude differentials.

Middle East and Asia: Whilst Asian markets continue to discuss China’s slowing demand, Saudi Aramco cut the formula price of October-loading grades below current spot differentials of medium sours, prompting another m/m increase in Chinese nominations and a recovery in Indian demand.

Atlantic Basin: Outlook for US medium sour markets to remain weak over Q4 despite supply outages in the Gulf of Mexico

US crude markets received a temporary boost from Hurricane Francine, which disrupted crude and condensate production in the US Gulf, with producers shutting down up to 40% of the region’s output on 11 September, according to the Bureau of Safety and Environmental Enforcement (BSEE). This represents a strong uptick compared to the levels observed the day prior, which saw around 24% of the region’s total production remain shut.  

Nevertheless, the impact on US crude markets is expected to remain short-lived, with production returning to normal levels over the coming days. Considering this, US Gulf crude and condensate production will average 1.7 Mbd in September, in line with our previous estimates that had already incorporated potential hurricane-related outages into our forecasts for this month and the next (see chart below).

US Gulf crude and condensate production, Mbd

Source: EIA

Despite the outages in the US Gulf, Mars crude differentials have remained relatively stable over the past week with the Mars versus WTI Houston spread remaining around a $2/bbl discount at the time of writing (see chart below). Downward pressure continues to come from relatively elevated production levels from the US Gulf, with output remaining almost flat and around 1.8 Mbd over the first eight months of the year (see chart above). This stands in contrast to previous years, which have remained quite volatile over the same period.  

Mars differentials, $/bbl

Source: Argus Media

Moreover, US production of medium density crudes is expected to rise further towards the end of the year, with Shell’s 100 kbd Whale project coming onstream over the next months. This will lift output in the US Gulf to record highs, with Chevron’s 75 kbd Ballymore project, which plans to begin operations in 2025, expected to keep regional medium density supplies supported further next year.  

Additional downward pressure for medium density crude differentials is expected to come from a longer than typical US crude and condensate balance, which will keep crude availability supported over the remainder of the year. In fact, the US crude and condensate balance has remained exceptionally long compared to previous years so far this year, with the US crude balance hovering outside of the 5-year average between June and August of this year (see chart below).

US crude and condensate balance, Mbd

Source: Kpler

The expected rise in the US crude and condensate balance over the next month is a result of a combination of factors, including a rise in US crude supply, and a seasonal decline in crude demand. The former is a trend we have not seen much of so far this year, with output remaining almost flat as producers focused on shareholders' return, rather than growth, with others replenishing depleted drilled-but-uncompleted wells over H1, which includes the likes of Chevron etc. However, oil majors such as Chevron and ExxonMobil plan on ramping up production over the remainder of the year, which will output higher over Q4, with US crude supply expected to average between 13.5-13.6 Mbd in November and December (see chart below).  

US crude and condensate supply, Mbd

Source: Kpler

Europe and FSU: Partial Libyan export resumption and weak margins pressure European light sweet differentials

Despite a recent drop in flat prices, with ICE Brent falling below $70/bbl to its lowest since December 2021, physical oil markets in Europe remain relatively tight. The backwardation on North Sea Dated has eased w/w, with the three-month spread narrowing to $1.48/bbl from $2.09/bbl last week, but the market remains firmly in backwardation. This tightness has triggered a modest rebound in oil prices, pushing ICE Brent’s front-month above $72/bbl at the time of writing.

Looking ahead, European demand is expected to decline in September and October due to seasonal factors and refinery maintenance, which will reduce refining capacity by 270 kbd m/m in September across the EU-27. However, this year’s maintenance schedule is lighter than in previous years, with significant turnarounds focused on TotalEnergies’ Leuna refinery in Germany and CEPSA’s San Roque refinery in Spain. Consequently, we forecast EU-27 refinery throughput to average 70 kbd higher y/y between September and December, reaching 9.97 Mbd.

Despite these seasonal declines in demand, imports into the EU-27 could remain strong through year-end, supported by stable onshore inventories and competitive Middle Eastern crude pricing. Aramco’s reduction of its OSP for Arab Light to Europe by $0.80/bbl for October (now $0.45/bbl above Bwave) is a more aggressive cut compared to its reduction for Asia. Similarly, SOMO has slashed its Basrah Medium OSP by $0.80/bbl, positioning it nearly $5/bbl cheaper than Arab Light, although higher freight costs due to the three quarters of Basrah cargoes reaching Europe going via the Cape of Good Hope are a factor. Meanwhile, KPC has cut its October price by $1.10/bbl for Europe, but imports of Kuwaiti crude remain rare, with only one delivery since 2020.

TotalEnergies’ Donges refinery in France experienced an unexpected partial closure due to a hydrogen leakage at the desulphurisation unit. While the issue was resolved after a one-day outage, full resumption of the impacted CDUs is expected to take several days.

Libyan oil exports remain heavily disrupted, with volumes well below normal levels at 328 kbd mtd, compared to an average of 1.04 Mbd over the previous three months. However, the past week saw a few successful loadings. Four tankers loaded crude from different ports, including 600 kb of Brega crude destined for the UK, with other cargoes of Es Sider, Attifel from Zueitina, and Sarir/Mesla heading to refineries in Italy and Greece.

Libyan oil exports by origin port, kbd

Source: Kpler

Despite these developments, we estimate that half of Libya’s production remains offline. Stable inventories at ports like Es Sider and Marsa el Brega suggest some wells are operational, but political uncertainty continues to cloud the outlook. UN-led talks, which resumed on 12 September, could lead to a resolution that may enable more crude to reach global markets, potentially weighing on prices and further pressuring light sweet crude differentials.

The recovery in Libyan exports, combined with weaker gasoline cracks in NWE, has led to a modest correction in Mediterranean light crude differentials. Grades like BTC, CPC, and Saharan Blend have softened by around $0.50/bbl in recent sessions.

MED light sweet oil differentials to NSD, $/bbl

Source: Argus Media

However, light sweet differentials could rebound if US crude flows to Europe are disrupted by Hurricane Francine. Although nearly 40% of Gulf of Mexico oil output has been temporarily shut down, key export hubs like Corpus Christi and Houston, which handle WTI and Midland crude, have not been affected. The closure of the LOOP terminal, where medium sour crude such as Mars is exported, could provide some support to Johan Sverdrup differentials, especially in the face of lower Middle Eastern OSPs.

In Central Europe, MOL has secured continued Druzhba pipeline flows through Ukraine by assuming operator responsibilities from the Belarus-Ukrainian border. This deal resolves concerns over potential supply disruptions after Kyiv banned Lukoil from transporting Russian crude through its territory. With Lukoil volumes back online, Central Europe can breathe a sigh of relief, particularly as refinery turnarounds are nearly complete, leaving only a 57 kbd CDU at Hungary’s Duna refinery still under maintenance.

Druzhba flows by destination country, kbd

Source: Kpler

Middle East and Asia: Saudi Aramco’s October OSP cuts bring term barrels back in the money, lifting Chinese nominations

As the oil industry gathered for its APPEC annual gathering in Singapore, the Asian physical market continued to chart a completely different path to flat prices. The Dubai M1-M3 spread remained just as wide as it was in the first trading days of September, hovering around $1.8/bbl. Similarly, backwardation in the IFAD Murban futures contract seems to be indicate tight supply as the M1-M3 spread averages $1.75/bbl this month to date, up $0.60/bbl compared to August. With the weakness of Chinese oil demand and the prospect of looming oversupply dominating the media narrative, physical activity in Asia has perked up after a lukewarm summer. Interestingly, the volume of Murban traded daily has been relatively moderate in September, averaging 7 MMbbls/day after a very tumultuous August that saw the highest ever daily traded volume of 20.6 MMbbls on August 09.

We have previously indicated that with the Dubai cash-to-futures spread falling by $0.55/bbl m/m in August and product cracks falling across the board, the October OSP of Arab Light should drop by some $0.60/bbl compared to September’s $2/bbl premium against the Oman/Dubai average. However, the Saudi NOCs October formula prices exceeded expectations, being slased by $0.50-1.00/bbl, with Arab Heavy and Arab Medium seeing the steepest cuts. Arab Light was lowered by $0.70/bbl on the month, to a $1.30/bbl premium to the two Middle Eastern benchmarks. Whilst normalization has become the buzzword of the oil markets lately, the Asian OSP premium of Arab Light over Dubai is still notably below the 2015-2019 average of $0.40/bbl, however the October formula price is the lowest since March 2021. Whilst Middle Eastern pricing generally turns more lenient in the period when term buyer ought to nominate their annual volumes for the upcoming year, demonstrating NOCs’ readiness to listen to the concerns of buyers, this pricing cycle marks the second straight month when Saudi Aramco’s pricing moves have been softer than expected.

Arab Light formula prices vs respective regional benchmarks, $/bbl.

Source: Saudi Aramco.

China has become the main liability of Saudi Aramco’s demand swings, however after exceptionally weak lifting demand over the summer months nominations of Chinese term holders have been continuously increasing. After the reported total of 43 MMbbls in September, October nominations have seemingly edged even higher to 46 MMbbls, just a tad below 1.5 Mbd. In general, as Saudi Arabia’s crude burn moves lower with peak day temperatures soon expected to fall below 40° C, seaborne crude exports should at last recover to the 6 Mbd mark after averaging 5.5 Mbd in June-August. The pace of Saudi crude loadings in September to date has been almost 300 kbd higher than last month, coming in at 5.94 Mbd. Constructive OSP pricing has played a key role in reviving strong buying interest for Saudi barrels as spot-traded grades have by now become more expensive than their formula price-based peers – the premium of spot Upper Zakum continues to hover around $2/bbl, with QatarEnergy’s monthly Al Shaheen tender expected to come in at equivalent levels. After unprecedentedly low volumes in July-August, Indian refiners are also rumoured to have lifted their Saudi nominations for October.

Saudi Arabia’s seaborne crude exports, kbd.

Source: Kpler.

The steepness of the Saudi OSP cuts in Asia has put other Middle Eastern producers in a difficult position. Iraq, which did not really see demand for its term barrels diminish the same way that Saudi Arabia did with its Chinese and Indian nominations, cut its October-loading formula prices by a uniform $0.50/bbl compared to September. Consequently, Basrah Medium flipped to a -$0.50/bbl discount vs Oman/Dubai, marking the first time in a year that its OSP was not lower than the heaviest Saudi grade, Arab Heavy. The October formula price of Basrah Heavy dropped to a -$3.5/bbl discount to Oman/Dubai, which means that even with a $1.5/bbl VLCC freight cost to China landed prices of the Iraqi heavy sour would come in some $5/bbl more expensive than Canada’s TMX grades. Despite Basrah Heavy being superior in quality – quite the statement considering its 4% sulphur content and 24 API gravity – shrinking margins in China could prompt some refiners to risk going for the inferior barrel, seeking to maximizing revenue whenever possible. In stark contrast to Iraq’s state oil marketer SOMO, Kuwait has slashed the October formula prices of its flagship KEC grade even more than Saudi Aramco, by $1.10/bbl, bringing the medium sour grade to a slight $0.15/bbl premium over Oman/Dubai.

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