Regional oversupply to pressure European crude differentials in April

Americas:

• Bullish on crude futures in H2 March and April amid improving macroeconomic indicators in the US and declining Venezuelan supply.
• Bullish on Mexican Maya crude differentials as demand for heavy sour grades increases in an environment of reduced Venezuelan supply and potential US tariffs on Canada.
• Bullish on Canadian oil exports to the US as Trump refrains from implementing tariffs fully and flows recover in April compared to Feb/March levels.

Atlantic Basin:

• Bearish on European medium crude differentials in April amid a lengthening in the global crude balance, sluggish European crude demand, higher flows of competing grades from Brazil and the Middle East to Europe, and a weakening in west-to-east arbitrage opportunities (especially for medium density grades, which remain more expensive compared to its lighter peers).
• Bearish on BFOET crude differentials in April amid a ramp up in production from the delayed Johan Castberg field next month, sluggish European crude demand, and robust flows of competing grades from Libya and the U.S.
• Bullish on Libyan crude flows to Europe, which reached an all-time high of 1.1 Mbd via this route in February, with output expected to remain flat at around 1.2 Mbd over the coming months, keeping exports steady.

Middle East and Asia:

• Bearish on Dubai backwardation, as heavy refinery maintenance has started to weigh on buying activity and nominations.
• Bearish on light sweet vs medium sour spreads due to outperforming regional fuel oil cracks and higher SE Asian production.
• Bullish on Iranian floating storage build-up. US sanctions are tightening, further challenging the supply chain moving Iranian oil to China.

Americas: Trump tariff uncertainties trigger oil market selloff

Over the past weeks, the U.S. has engaged in a series of back-and-forth tariff moves against major trading partners, including Canada, Mexico, and China. On March 4, it initially appeared that Trump would impose a 10% tariff on Canadian energy imports, 25% on Mexican energy imports, and 20% on Chinese imports, triggering retaliatory tariff announcements from both China and Canada. However, shortly afterward, Trump reversed course, announcing a temporary pause on these tariffs until 2 April for goods covered under the U.S.-Mexico-Canada Agreement (USMCA). Despite this concession, in early March, Trump unveiled plans to double tariffs on Canadian steel and aluminium imports to 50%. The heightened uncertainty for businesses, consumers, and investors and the looming risk of a trade war, fueled fears of an economic downturn. As a result, global oil and stock markets saw another sell-off. The S&P 500 index closed at 5,572.07 on March 11, down 9.3% from its February 19 high and at its lowest level since September 2024 (prior to Trump's election victory). ICE Brent and WTI NYMEX also plunged to six-month lows of $69.28 and $66.03 per barrel, respectively, on March 10. However, crude futures rebounded somewhat on March 12 following an unexpected dip in U.S. inflation for February—the first decline in four months. Looking ahead to H2 March and April, we anticipate a moderate recovery in oil prices, with WTI NYMEX expected to move closer to the $68/bbl mark. This will be driven by a sharp decline in Venezuelan oil supply, lower than expected crude inventories, improving US gasoline cracks and macroeconomic dynamics (lower CPI inflation, PPI).  

ICE Brent and WTI NYMEX futures, $/bbl

Source: Argus Media

Mexican crude valuations have recently strengthened amid concerns over potential U.S. tariffs on Mexican oil imports and declining production levels. On March 11, the Maya crude discount versus WTI narrowed to $5.73/bbl—$2/bbl higher than a year ago and the smallest discount since September 2023. Other LatAm grades, such as Colombian Vasconia, have also seen significant upside, with the grade's spot premiums surging to $1.77/bbl vs WTI, the highest levels since August 2022. Tightness in heavy sour markets has been accelerated by combined Ecuadorian supply in February (combined exports from Argentina, Colombia and Ecuador falling by 110 kbd m/m in February to 909 kbd). We expect crude differentials for the likes of Maya and Vasconia to continue rising as demand for heavy sour crude increases, particularly with reduced Venezuelan supply and potential tariffs on Canadian oil. In 2024, approximately 60% (or 280 kbd) of Maya exports went to the U.S., but these volumes could increasingly be redirected to South Korea and India.

Maya USGC vs WTI (Apr), $/bbl

Source: Argus Media

The latest EIA data indicates that U.S. crude imports from Canada reached 4.091 Mbd in the week ending February 28, the highest weekly volume since mid-January. This brought last month's average to 3.87 Mbd—down 230 kbd (6%) from January and the lowest monthly total since October 2024. While Trump is set to make another decision on Canadian energy import tariffs on April 2, our base case scenario suggests that these tariffs on Canadian and Mexican oil imports will not be fully implemented. Instead, they are likely to be applied in a reduced or temporary manner to leverage concessions in trade negotiations. Several factors support this view: the U.S. is already facing a shortage of heavy crude due to the revocation of Chevron’s license to operate in Venezuela and declining Mexican output. Additionally, imposing tariffs would ultimately hurt U.S. consumers, increase the risk of a trade war, and push the U.S. closer to a recession.

US crude imports from Canada, Mbd

Source: EIA

Atlantic Basin: A regional oversupply will pressure European crude differentials in April

European medium-density crude differentials have remained firm throughout March, with the region’s key benchmark, Johan Sverdrup, maintaining a premium of approximately $1/bbl over North Sea Dated in the past month. This strength has been primarily driven by increased flows to Asia, supported by more favorable west-to-east arbitrage conditions in February, alongside steady demand from core buyers such as from Polish refiner Orlen, the largest single purchaser of Johan Sverdrup, who secured another cargo this week. However, downward pressure on European medium-density crudes is building, with several factors expected to weigh on the market through Q2. These include an anticipated rise in supply of competing grades from Middle Eastern OPEC members starting in April, following the recent OPEC+ policy adjustments, higher crude exports from Brazil, subdued European crude demand over April-May, and a recent softening in west-to-east arbitrage economics. The impact of the OPEC+ supply increase is already visible in the European crude market, with Saudi Aramco and Iraq’s SOMO lowering their official selling prices (OSPs) for April-loading crude to Europe by $0.10-0.40/bbl, with a ramp up in Brazil’s pre-salt supply expected to lift flows of competing grades from Brazil to Europe over Q2 as well.  

Regional sweet-sour spreads, $/bbl

Source: Argus Media

European light sweet crude differentials have received support from the delayed startup of Norway’s Johan Castberg field, which was initially scheduled to come online at the end of last year. According to the latest loading schedule, the new Norwegian grade is now expected to load its first cargo in mid-April, with the April program comprising four 700-kbbl shipments. Given the field’s lighter and sweeter profile (API gravity of 34.7° and sulfur content of 0.16%), lighter crudes are expected to bear the brunt of this production increase. This comes amid additional headwinds for European crude markets, including rising OPEC+ supply, subdued European crude demand—which is expected to average 11.7 Mbd in April, roughly in line with year-ago levels—and an extended global crude surplus, projected to average 1.4 Mbd in April. As highlighted in previous reports, a rise in the availability of competing grades from the US and Libya (will be discussed below) is set to remain robust over Q2, too. While BFOET crude differentials have firmed in recent sessions, with Forties reaching a two-month high of $1/bbl against North Sea Dated, these gains may prove short-lived, with differentials potentially softening in the coming weeks.

BFOET crude differentials, $/bbl

Source: Argus Media

Libya’s crude supply has been increasing due to a sustained ramp-up in domestic upstream activity, with total crude and condensate output averaging 1.2 Mbd over the first two months of the year. This marks a significant recovery from the crisis-induced production outages in September last year, when output fell to nearly half of this level. This has seen Libya’s seaborne crude exports surpass 1.2 Mbd last month, rising by 70 kbd m/m and aligning with April 2019 levels, the highest on record. Of this total, over 1.1 Mbd was shipped to European refiners, well above typical volumes and setting a new record—exceeding the previous all-time high, set a month earlier, by 100 kbd. The remaining volumes consisted of a single cargo bound for Asia and another for the U.S. Despite Libya’s efforts to attract foreign investment to further expand production, output is expected to remain flat around 1.2 Mbd in the coming months. This will keep European markets well supplied with lighter grades. This is especially true given that U.S. crude flows into Europe are expected to stay elevated, supported by a longer-than-typical U.S. crude balance throughout Q2 (on the back of robust US shale supply and a refinery closure in Houston).

Libyan crude exports to Europe by grade, kbd

Source: Kpler

Middle East and Asia: Refinery maintenance set to ease market tightness in the East of Suez

Saudi Aramco’s April OSP reductions of $0.30–$0.60/bbl into Asia—including a $0.40/bbl cut for Arab Light—did not result in an increase in allocations. Instead, Chinese refiners reduced intake to 36.5 Mbbls (1.22 Mbd), down from 41 Mbbls (1.32 Mbd) in March.

The primary driver of this decline is Asia’s upcoming heavy refinery maintenance season, which will see an additional 1.4 Mbd of refining capacity taken offline across Eastern and South-Central Asia through mid-May. In China, refinery outages alone will reach 1.6 Mbd, impacting crude allocations. Sinopec’s refining throughput is set to decline by 520 kbd by May, contributing to the company’s decision to halve its allocation of Arab grades to just 3 Mbbls for April.

We believe traders are also holding off on purchases, expecting further declines in May OSPs. This expectation stems from a sharp easing in Dubai’s backwardation, which has contracted by $2/bbl to $1.21/bbl.

On the supply side, Saudi domestic crude demand is expected to rise by 170 kbd between March and May due to seasonal increases in crude burn for power generation, limiting potential export growth.

Eastern Asia, South-Central Asia refinery runs, Mbd

Source: Kpler

In anticipation of lower May OSPs, Asian refiners are pivoting to lower-cost alternatives. UAE’s Upper Zakum crude, currently priced at a $1.30/bbl premium to Dubai, has seen strong demand, with exports averaging 813 kbd in March, up 211 kbd from February. Indian refiners, particularly Indian Oil’s Paradip refinery, are set to take 103 kbd this month, the highest level in nearly two years.

Similarly, exports of Canadian TMX crude to Asia—predominantly to China—have surged, with 246 kbd shipped in March so far, up from 191 kbd in February and 108 kbd in January. Priced at a $2.75/bbl discount to Dubai, TMX is the cheapest non-sanctioned heavy sour crude available to Asian refiners. Meanwhile, Russian crude flows into Asia are expected to increase in the coming weeks as buyers take advantage of discounted volumes amid ongoing Western sanctions.

The easing in Dubai backwardation has widened the spread between light sweet and medium sour crude. The Asian light sweet basket now commands a $2.50/bbl premium over Dubai, reversing from a $0.14/bbl discount in late February. However, this spread is likely to narrow as regional fuel oil cracks continue to outperform and Shell starts producing from the GKGJE Phase 4 project (Malaysia-Brunei), set to reach 21 kbd.

Selected grades’ differentials to Dubai, $/bbl

Source: Argus Media

A new wave of US sanctions against Iran, announced on March 13, targets Oil Minister Mohsen Paknejad and 18 affiliated companies, along with adding 13 vessels to OFAC’s sanctions list. While Tehran publicly rejected US-led negotiations, we believe that indirect talks—possibly mediated by Russia—are underway.

Despite Iran’s strong crude export rebound in February, arrivals into China remain below potential, averaging 1.43 Mbd in February and 1.14 Mbd in March. This has led to a build-up of Iranian crude in floating storage to 26 Mbbls, particularly off Singapore and Malaysia, as cargoes await STS transfers before reaching final destinations in China.

Iranian oil in floating storage, Mbbls

Source: Kpler

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