Over the past two weeks, the narrative of the light sweet crude market has been predominantly shaped by supply-demand mechanics, culminating in a substantial rise in market activity. Freight has remained a dominant factor of market dynamics with levels too high for WTI to land in Europe competitively, with this further compounded by the inclement weather in North America, resulting in a supply squeeze in Cushing and a sharp rise in WTI spreads.
As the focus shifted to the tightening market conditions and players searched for barrels, we saw refiners piling in on the buy-side and trade houses seizing the opportunity for a pricing play. As prices shifted higher, many short speculators were seen stopping out of positions, exacerbating the rally. Due to a small leak at the Finnart terminal, we saw Forties differentials driven higher, putting further upward pressure on prices.
Notably, it has not been followed through on the forward curve which aggressively indicates it is very much isolated to prompt barrels. Front CFDs have been strong with strength also filtering into 12-16 Feb which is trading around 46c/bbl now, though backend Feb rolls feel far more supported by strength in Brent spreads, and therefore are potentially nearing a resistance point at their current levels.
The Brent/Dubai Exchange of Futures for Swaps (EFS) has reached its highest level since late November, reflecting the growing tightness in the market for sweet, Brent-linked crudes in particular, especially when compared to sourer varieties. This is a key indicator of the prevailing market sentiment and the perceived value of different crude grades with Feb Dated/Dubai soaring to triple digits last week and remaining firm around 130c/bbl.
However, the impending refinery maintenance season is poised to be a pivotal factor in shaping market dynamics in the upcoming weeks and it remains to be seen if this strength can be sustained. Prior to the recent rally, Europe grappled with an oversupply situation, and there are signs of relief this week as Libya lifted its force majeure on the Sharara Oil Field after the turbulent shutdown, which should ease some of the supply tightness.
We are starting to see a bit of a build-up of crude in Houston and getting more US players looking at the arbs. So either WTI/Brent needs to give way or freight needs to come off to make the arb work, and when this becomes workable we expect more WTI to start hitting Europe, just as refineries in Europe begin to undergo maintenance.
