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Forties spread over Urals at 24-week high, sweet-to-sour switch looming

London (Platts)--14 Sep 2017 852 am EDT/1252 GMT


Forties crude's premium, basis FOB, to Urals has risen to a 24-week high, leading to talk that a switch from sweet to sour crudes may be looming, sources said Thursday.

Related video -- Brent crude oil volatility: September outlook

The value of Forties has skyrocketed over the past week, boosted by persistently strong bidding interest from Glencore, Petroineos and Shell in the Platts Market on Close assessment process.

That left Forties at Dated Brent plus 92 cents/b Wednesday, from Dated Brent plus 18 cents/b last Thursday, S&P Global Platts data showed.

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For Urals, backwardation in Brent contracts for difference -- which does not pay for storage costs involved in keeping the crude, encouraging owners to sell barrels held in tanks -- coupled with a closed arbitrage to the East has had a significant impact recently, leading the grade to shed 58 cents/b in value versus Dated Brent since September 1.

That all left Forties at a $3.455/b premium to Urals FOB Wednesday, the highest since March 31 and after being at 92 cents/b less on August 16.

"Urals is in a two tier market at the moment, where the front is really weak driven by the Brent CFD differentials while value is still OK at the end of the curve. There are some 15-20 cents/day contango structure across the curve," a Urals trader said.

A closed arbitrage to Asia has been part of the pressure on Urals.

The exchange of futures for swaps, which expresses the price difference between Brent and Dubai and where a narrower EFS means that selling Brent-related crude oils such as Urals or Forties into the Asian market is more economical, has dropped significantly since the beginning of August, dropping almost 80 cents/b.

"With the arbitrage to the East shut, even more Urals crude needs to find a home in Europe and that is, of course, weighing on differentials," a Urals trader said.


SWITCH


Meanwhile, the recent rise in Forties relative to other local crudes could encourage Northwest European refiners consider a switch to alternative grades, according to sources who highlighted the poor economics attached to BFOE grades.

"Locally BFOE is the worst value barrel versus Med and WAF sweets, or Urals sour," a trader said. "BFOE cracking margins are the worst locally. We also expect around 750,000 b/d of maintenance [in Northwest Europe] across October, versus around 600,000 b/d in September."

However, market participants expressed doubts over the sustainability of the recent rally in the Forties market, reporting more balanced fundamentals in the wider market than suggested by the strength of the differential.

Additionally, a stream of US crude oil barrels making its way to Europe could challenge the strength seen in Forties.

"Harvey's impact on Brent/WTI together with the phenomenal strength of Brent futures and swaps complex has left arbs into the region wide open, while closing arbs out," a trader said.

Rising BFOE physical differentials have been reflected by a buoyant BFOE swaps market, which shows an ever-tightening structure on BFOE CFDs, the Dated to Frontline swap, Dated Brent paper, and ICE Brent Futures.

--Marcel Goldenberg, marcel.goldenberg@spglobal.com
--Maude Desmarescaux, maude.desmarescaux@spglobal.com
--John Morley, john.morley@spglobal.com
--Edited by Dan Lalor, daniel.llaor@spglobal.com




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