LONDON: North Sea crude price differentials have fallen to their lowest in over a month, led by steep declines in the price of Forties, but this weakness is likely to be short-lived as a wave of spring refinery maintenance in Europe peaks.
Seasonally, the first quarter is the weakest for the Forties market, when differentials have fallen on average by 0.3 percent in the last 20 years, compared with the third quarter of the year, when they have tended to rise by 0.3 percent
The price of a barrel of Forties, the largest of the North Sea crude streams, is set for its biggest quarterly fall, down$1.82 a barrel in the first three months of the year, since Reuters records began 20 years ago, in spite of evidence of growing demand for North Sea crudes.
One analyst, who declined to be named, estimates refinery maintenance will peak in early May, when close to 1.6 million barrels per day of capacity is scheduled to be offline around western and eastern Europe, the Mediterranean and Africa.
Within northwest Europe, the natural home for most North Sea crude demand, turnarounds are expected to peak in mid-April, when some 430,000 barrels per day (bpd) of capacity is due to be unavailable.
It is at this point at which differentials, the premium or discount relative to the dated Brent benchmark price at which physical barrels trade, are expected to head higher.
"I would argue we are just trading peak refinery maintenance bbls, I reckon that's all there is to it," one trader said. The bull case for North Sea crudes is looking strong in the second quarter of this year and into the third.
Some 50 million barrels, or around 2.17 million bpd, of the 12 North Sea crudes tracked by Reuters have loaded so far in March, bound for customers within the region, while some 6 million barrels are due to sail to overseas customers, according to Reuters trade flows data.
This compares with the 42 million barrels, or around 1.8 million bpd, that had loaded at this point in March last year, with 6.7 million leaving the region.
BRIGHTER BACKDROP
"It is worth noting that maintenance levels around the globe and especially in the North Sea were particularly low in 2015, with output some 500-700,000 bpd higher compared to the five-year average between March and October," Vienna-based consultant JBC Energy said in a report.
"Hence, there is a chance that we see longer and more severe outages due to maintenance later this year."
The backdrop for Forties, as well as some of the lighter grades such as Ekofisk, is improving, even if this grade will have to vie with hefty supply in early April of Urals, a close match for the North Sea crude among European buyers.
Refining margins for Forties, Ekofisk and Brent fell to their lowest in nearly two years at the start of this month, as gasoline cracks crashed to one-year lows, making it barely profitable to run this grade of crude, and adding to the threat of run cuts at the time.
But with the recovery in the dated Brent price, this threat has now ebbed.
The swaps curve, as depicted by contracts-for-difference (CFDs), shows an anticipated pickup in prices from mid- to late April, as the contango has steepened to closer to 70 cents a barrel, from a backwardation of 20 cents just four weeks ago.
Energy Aspects, a consultant, notes that unplanned refineries outages are at their highest in 21 months in March and going into the summer, supply will be limited.
"North Sea maintenance is hefty across June and July. CPC exports are set to fall by over 10 percent m/m in April due to field maintenance along with works in Azerbaijan too.
So summer supplies will be tight," the group said.
The 180,000-bpd Buzzard field, which feeds the Forties stream, undergoes a month of maintenance work in July.
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