Energy Weekly:Asian Congestion Already Spilling Over Into Europe and Iran Looms

The sub-7% 3Q’15 China GDP print prompted an industrial commodity sell off,but news from last week that the extreme congestion in Asian crude marketsis starting to spill-over into Northern Europe bolsters the link between risk-offsentiment and the physical world of oil benchmarks. Saudi Aramco, facing anincreasingly congested Asian marketplace and record inventories of its own (seechart 1), has started to push crude into Northern Europe. One cargo arrived lastmonth in Poland and another two vessels are on the water and due to arrive thismonth.

    While the Mediterranean region has always been a bit of a battlegroundbetween Middle Eastern, Russian and Caspian producers, Northern Europehas generally been Russia’s domain given the higher costs of shipping crudeall the way around continental Europe versus Russia’s pipeline network. Thisimplies that Aramco is itself swallowing the discounts required to make their crudecompetitive, with higher freight costs, a widening Urals-Brent discount and stableN.W.E Aramco OSPs all boosting Russian competitiveness. Asian refiners havebeen in turnarounds, and it remains to be seen whether these Saudi flows persistonce refiners ramp-up in November. If these flows persist they will add weight to theBrent benchmark, even as declining US production has increased the import pullinto the US and thereby taken weight off the benchmark.n。

    Sunday was ‘Adoption Day’ for the Iranian nuclear deal. This is only the startof making the deal—and the removal of sanctions—a reality, but with ≈0.5 mb/d of additional Iranian crude expected to hit the market early next year itfurther raises the odds of the extreme Asian congestion spilling over intoEurope over the next few months.

    Distillates have had a tough time of late, as cracks in the US, Europe and Asiahave all collapsed despite refiners currently in maintenance and winterdemand emerging. The IEA estimate global refinery runs up 2.5-m b/d y/y in3Q’15, which has swamped the distillate complex with excess barrels as demandstruggles (see Energy Weekly: VW Scandal Pushes Diesel towards the PerfectStorm). The recent softness in diesel/gasoil cracks allied with seasonal gasolinedeclines has pushed N.W.E margins below $4/bbl, and they’re trading even lowerfor deferred pricing. Margins need to remain lower for a more sustained period forrun cuts but they may materialize in 1H’16, and would most likely be in Europe,making it even tougher for additional Middle Eastern barrels to be placed.