The first signs of a sturdier physical oil market are beginning to emerge as evidenced by the healthier state of light sweet crudes in the Atlantic Basin, buoyed by robust demand from global refiners supported by healthy margins and refined product cracks.

• Values of WAF, North Sea crudes surge
• Demand for thes crudes jumps, as refinery runs intensify
• Diesel leading the way, with supply outlook tightening

Traders told S&P Global Platts that the fundamentals in the oil market are strengthening as these light sweet crudes are suddenly selling swiftly, as a stronger middle distillate and gasoline complex are making such crude more appealing to refiners.

Related article: Strong demand for North Sea crude oil triggers steep backwardation

The beleaguered light sweet barrels, especially those from Nigeria, which over the past few years have been selling sluggishly compared to their sour and heavier counterparts, are suddenly seeing a temporary lease of life.
Traders have said the pace of trading for the September Nigeria loading program has been noticeably quicker than in previous months, as refiners from a number of regions scramble to take advantage of buoyant margins before the onset of autumn maintenance.

"The Nigerian market is getting into shape," said a WAF trader. "The overhang has been reducing every month and the Indians, Americans and Brazilians have all been buying. The market has strengthened on lights and sweets across the Atlantic Basin."

Differentials for light sweet crude in Nigeria have mirrored the strength in the Mediterranean and North Sea in the past few weeks, with grades such as Qua Iboe rising to the highest levels of the year this week.

Qua Iboe was assessed at a $1/b premium to forward Dated Brent Thursday, its highest level since mid-December last year.

This is also being reflected on the oil futures market along with the bullish factors that include the steady drawdown in US crude stocks and a recent pledge by Saudi Arabia to limit exports to 6.6 million b/d in August.

There is a very narrow contango in the front two to three months of the ICE Brent curve but there is a brief backwardation in the back end amid ciphers of tightening fundamentals.

ROSY DIESEL OUTLOOK

The support for Nigerian barrels is well backed up by a much stronger middle distillate complex.

The near-term outlook for 10 ppm ultra low sulfur diesel is particularly rosy for the bulls in the market as current refinery outages combined with heavy autumn maintenance converge to leave a gap in production for the next few months.

This is clearly demonstrated on the move to backwardation on the near term ICE low sulfur gasoil futures curve. The Aug 17/Dec 17 spread, effectively a barometer until the end of the year, blew out briefly to a backwardation of $16.25/mt before settling to around $8.50/mt Friday, double the backwardation prior to the news of Pernis.

The backwardation is causing physical diesel and jet fuel cracks to hit close to two-year highs as refiners struggle to meet to demand amid reduced production.

"There's a huge amount of production out of ARA that is missing," a source said. "And we are running into the turnaround season without builds (in stocks)." The latter point means that the market is threatening to get tighter as the builds from the recent contango era are sold into prompt demand, depleting storage levels.

NORTH SEA CRUDE COMPLEX STRENGTHENS

North Sea crude oil is rising in tandem with the rest of the Atlantic Basin crude markets, in a move that saw differentials across the Mediterranean and West African markets soar lately.

"After a few depressing years on the market sentiment we are finally seeing the market pick up momentum and some real supportive fundamentals," a North Sea crude trader said.

"We are also seeing some demand on our side from European refiners and they are willing to pay market prices. Margins are incredible, despite the strength in Dated [Brent]," the trader added.

Similarly, in the North Sea, BFOE differentials to Dated Brent rose to multi-month highs this week. Differentials of both Brent Blend and Forties are now at their highest level since January 2016, according to Platts data.

Brent Blend and Forties were assessed at a premium of $0.465/b and $0.45/b to Dated Brent respectively on Thursday.

The North Sea complex has also been driven by an upsurge in bidding activity, this week.

Wednesday alone saw four companies -- Vitol, BP, Statoil and Totsa -- post a total of 13 bids in the Platts Market on Close assessment process.

However, there is still some skepticism on how sustainable the current strength is, with some suggesting that the underlying backwardation will be hard to hold.

This is seasonally a time when refinery runs are very high, backed by strong demand, and field maintenance in the North Sea.

News that Europe's largest refinery, Shell's Pernis in Rotterdam, will be down till at least the second half of August due to a fire, has been very bullish for refined products.

"It seems strong at the moment and we have had the situation with the stoppage at Pernis but I think we've reached the top," said the second trader.

"The logical move is for refiners to defer maintenance at the moment but it can't be deferred much longer," he added. "After September there won't be much support in the market as there will be a lot of refinery maintenance in Northwest Europe. [In recent days] a lot of refiners have been buying to store so that they will be ready to go when they come back from maintenance."

--Eklavya Gupte, eklavya.gupte@spglobal.com
--John Morley, john.morley@sphglobal.com
--Maude Desmarescaux, maude.desmarescaux@spglobal.com
--George Shaw, george.shaw@spglobal.com
--Edited by Maurice Geller, maurice.geller@spglobal .com

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