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Demand from Asia and fuel oil refining margins will be the key drivers of price strength of the crude grades in the Atlantic Basin next year, just like they have been in the fourth quarter this year, an S&P Global Platts analysis showed on Wednesday.
In the fourth quarter of 2018, demand in Asia was determined by the Chinese independent refiners buying more crude than in previous months to use up their oil import quotas for this year. The impact of the U.S. sanctions on Iran was also a key price maker of the crude grades sold into Asia in recent months, as many buyers—uncertain if they would get U.S. waivers for Iranian oil—moved in to buy Atlantic Basin crude grades to replace shipments from Iran.
China’s independent refiners—the so-called teapots—bought a lot of crude grades from Angola’s October and November loading schedules. Higher demand in Asia resulted in discounts of most of Angola’s heavier grades to lighter crudes narrowing sharply. The differentials for Angola’s crude grades such as Dalia and Pazflor, for example, reached their highest for this year in October.
After November, however, the attractiveness of the Angolan crudes waned as the U.S. waivers on Iran’s sanctions eased the necessity for alternatives and rising freight rates made Angola’s crudes less competitive for Asian buyers.
Russia’s Urals sour crude in Northwest Europe and the Mediterranean hit multi-year highs in the third quarter, as refiners were buying to replace Iranian barrels and the fuel oil refining margins in Europe turned out to be surprisingly strong.
Northwest Europe’s refineries have already completed refinery maintenance and are expected to run at near-full capacity until April, which will likely support North Sea crude grades.
Going into 2019, there will be two wild cards in the European market. One is how oil product refining margins will behave ahead of the 2020 introduction of the International Maritime Organization’s (IMO) new rules regarding using only 0.5-percent or lower sulfur fuel oil on ships. The other wild card will be how much U.S. crude, arbitrage allowing, will make it to the Northwest European refineries, as some of them have become regular buyers of WTI Midland and Eagle Ford crude, according to Platts.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.