Opec+ unwinding to weigh on sour grades in Europe

Sour crude prices in Europe could come under pressure if Opec+ unwinds its voluntary output cuts as planned, but a halt to Libyan exports might temper the effect.

Eight members of the Opec+ alliance — Saudi Arabia, Russia, Iraq, the UAE, Kuwait, Kazakhstan, Algeria and Oman — plan to phase out 2.2mn b/d of extra cuts that were implemented in November last year in 12 monthly steps of about 180,000 b/d from October this year. But the plan carries a proviso that the unwinding is subject to "market conditions", leaving flexibility to the eight producers — and uncertainty to other market participants.

The short-term demand outlook for medium and heavy grades in Europe has been gloomy. European refiners are taking some of their capacity off line for maintenance in September-November. And middle distillate crack spreads have been weak and deteriorating over the past two weeks, stoking expectations that crude runs will remain low even after the maintenance is completed.

Saudi Aramco cut its official formula prices for September-loading supplies to European buyers by $2.65-2.75/bl. The Mideast Gulf giant is usually the first to publish official prices, and other regional producers tend to follow its adjustments when deciding their own prices. Some traders think subdued demand in Europe will predispose producers to cut their official prices again in October.

The return of medium and heavy crude supply to the market, coupled with steady or lower official prices from Mideast Gulf producers, could weigh on differentials for spot supplies, market participants suggest. Some key grades are already under pressure. Norway's medium sour Johan Sverdrup, the single-largest grade of that quality in Europe, fell to a four-month low against benchmark North Sea Dated in late August, at a $1.10/bl discount. Several September-loading cargoes are still available, mostly in the second half of the month, when refiners would have largely secured their September supplies, and the October export plan has already been published.

Brazilian medium sweet Buzios also dropped to a four-month low relative to North Sea Dated, while Iraqi Basrah Medium has been at a discount to its European formula price for most of August, down from a premium in July.

Libyan halt

At the same time, any spot crude price corrections are likely to be limited over the short to medium term, in light of a potential halt to crude exports from Libya, traders say.

Libya's eastern-based government in late August ordered all crude production and exports from the country to cease, the latest manifestation of the long-standing political tensions in the country. While some cargoes were still loading in late August from stocks, the move will effectively remove 1mn b/d of supply, 85pc of which has been going to European refiners.

Libya mostly produces light sweet crude and does not directly compete with Opec+ producers. The absence of exports from the country is mainly expected to boost prices for its key competitor Algerian Saharan Blend and also support prices for light sweet supplies from the US, North Sea, west Africa and the Russia-Caspian region.

But both Libyan and Mideast Gulf grades are rich in middle distillates, even though Mideast Gulf grades are typically more sulphurous than Libyan crude. A prolonged 850,000 b/d supply gap would push refiners to adjust their slates and seek any replacements available, lifting crude prices across the board and essentially cancelling out the unwinding of the Opec+ cuts over the next few months — provided the process takes place as scheduled.

By Lina Bulyk and Kuganiga Kuganeswaran

Norwegian and Iraqi crude vs Dated

Selected European imports by origin