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Ups and downs of Dated Brent crude market direct European Urals demand

April 10, 2014 -- By Paula VanLaningham & Alex Pearce in London

** Urals market characterized by Urals-Forties interplay
** Libyan production turmoil supports Med differentials
** Rebound in refining margins prompts sharp surge by end-Feb

Dated Brent

The interplay between Urals and North Sea Forties crude oil defined the European Urals market throughout much of the first quarter of 2014 -- particularly in Northwest Europe -- as refinery margins shifted sharply depending on the relative strength of Dated Brent.

Urals differentials started the year at deep discounts to Dated Brent, as demand for the grade dropped off across Europe on the back of weak refinery margins and competition from alternative sour crudes, particularly arbitrage flows from Latin America.

Analysis continues below...

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While refinery margins for Urals in both Northwest Europe and the Mediterranean struggled to move into positive territory throughout much of the second half of 2013, a surge in demand for Forties from Asia caused a sharp exodus of the grade in Europe.

Differentials shot up across the North Sea complex and the relative cost of Dated Brent increased sharply, pushing refinery margins in to sharply negative territory.

The Urals cracking margin in Northwest Europe bottomed out at minus $2.10/b on January 22.

Traders said that the decline in refinery margins early in January prompted a sharp drop-off in buying interest for Urals crude, despite shorter and shorter export programs from Russia in January and February.

CIF Rotterdam Urals cargoes failed to break above Dated Brent minus $1/b before late February, and bottomed out at Dated Brent minus $2.08/b on January 15.

CIF Augusta cargoes fell as low as Dated Brent minus $1.25/b on January 10 and largely held below Dated Brent minus $0.50/b throughout the first two months of the year.

However, as the Forties arbitrage to Asia closed on the back of rising VLCC rates in mid-February, the larger North Sea complex retraced early gains, taking some of the immediate pressure off of refinery margins and prompting a bounce in end-user buying interest in late February and early March.

In Northwest Europe, a rebound in cracking margins in late February and early March prompted differentials to surge sharply.

Between February 21 and March 13, CIF Rotterdam Urals differentials surged more than $1.30/b, briefly over-taking differentials for CIF Augusta cargoes, and opening a rare, if temporary, reverse arbitrage from the Mediterranean to NWE.

The ups and downs of Libyan production continued to support differentials across the Mediterranean sweet crude grades throughout much of the first quarter of 2014, while weak refinery margins encouraged a particularly fervent interest in Azerbaijan's distillate-rich Azeri Light crude for the first two months of the new year.

Differentials for Azeri Light peaked at Dated Brent plus $3.75/b at the end of February, though market sources said that trades had been heard well above Dated Brent plus $4/b.

Libya's central government in Tripoli reached agreement with protesters at the Sharara crude field in early January, re-opening exports of the country's naphtha-rich Sharara crude grade from the 230,000 b/d Zawiya export terminal in the western-half of the country.

While the majority of the country's land-based terminals in the east -- some 740,000 b/d worth of export capacity -- remained under the control of the Cyrenaica separatist movement, the resumption of exports out of Sharara removed some of the buying urgency from other naphtha-rich grades like Kazakhstan's CPC Blend and Algeria's Saharan.

However, stability in western Libya proved to be short-lived, as protesters once again blocked crude flows between the Sharara and Elephant crude fields in Libya and the Mediterranean coast, causing exports to grind to a halt.

By the end of the quarter, crude exports out of Libya had once again fallen below 100,000 b/d, market sources said.

While differentials for Saharan remained largely stable throughout the majority of the first three months of the year, CPC prices fell back steadily, weighed down by a surge in export volume.

Average daily loadings of CPC Blend rose steadily throughout the first quarter of the year, hitting 820,082 b/d in March, the highest volume since at least April 2012, according to Platts data.

Differentials fell to their lowest levels since July 2012 in late-March, as weak demand and persistent length weighed on the market.

The length of the CPC Blend program was driven by the redirection of crude flows from the Tengiz crude field in to the CPC Blend pipeline.

While crude from Tengiz has always made up a significant portion of CPC, the expansion of the pipeline to accommodate flows from the perpetually delayed Kashagan field in the Caspian Sea, created a significant amount of spare capacity, which was subsequently filled with Tengiz crude.

Production from the Tengiz field also started to find its way in to the BTC pipeline, emerging as Azeri Light out of the Turkish port of Ceyhan.

Next article: North Sea crude rangebound, with weak arbitrage depressing values by March

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