The resurgence of strength following a blip during expiry has allowed for the Dated market to enter February with strong buying in the face of a risk/reward skew previously thought bearish.
The physical diff was supported at 160c/bbl into the end of January. Initially, the threat of a Forties glut was floated based on barrels being unable to reach Asia. We then saw a Chinese player flipping to buying, joined by a trade house. Expiry threatened the market with a bearish regime as Brent spreads sold off and shook market confidence, with Apr/May dropping to 24c/bbl. The rhetoric surrounding this potential regime shift is hanging on the potential for an overhang in Europe and the looming refinery maintenance dampening crude demand in Asia and Europe.
March may see an increase in crude loadings, the Alvheim crude loadings, for example, are set at four cargoes of 520kbbl each for March, compared with three cargoes for Feb. Physical demand is expected to be lower as both Asia and Europe enter refinery maintenance season. The potential to delay the maintenance on the back of strong refinery rates is yet to be seen, yet if this occurs, the priced in maintenance may allow for a squeeze.
Another avenue of weakness is that the arbitrage from the US to Asia is not economically viable, which points more, cheap Midland barrels towards Europe, with the Mar TD3C freight rate being stable at around $14/mt, a potential addition to the overhang.
Renewed buying was witnessed in the prompt structure at the start of the new month, with the 5-9 Feb one-week roll paid up to highs of +105c. The Chinese buying continued out of 29-2 Feb as buying interest is extremely focussed on the front of the curve. This Chinese buying has been added to by a European major buying prompt CFDs.
The phys remains supported well into the triple digits which is supporting the prompt rolls, although trade houses have been seen selling at these levels both in the prompt and in the more deferred, where they are joined by majors. Strength seems localised in the front. The Bal-Feb DFL contract is lifting the curve, seeing strong spec buying from trade houses and Chinese players.
This strong Bal buying is often seen at the start of the month, and the strength in Dated currently is extremely prompt-focused so it will be a testament to the strength of these financial flows. It seems like a bear and mean-reversion story, after all of this talk of overhangs the market seems well-balanced.
The DFL forward curve looks orderly and priced in, with a weaker Q2 as a reflection of refinery maintenance whereas Q3 is stronger in anticipation of summer demand. The thin liquidity surrounding the Chinese New Year will be a key point to watch for potential squeezes and therefore, heightened volatility.
