European crude oil traders were weighing up the potential impact of Hurricane Harvey on the North Sea and West African crude markets Monday, with a potential short term alteration to trade flows providing much food for thought.
While Harvey's impact has been most keenly felt on product markets, with production reduced at refineries along the US Gulf Coast and the temporary closure of the key Colonial Pipeline, it also had the potential to reduce US crude exports in the short-term from the US Gulf Coast to areas such as North West Europe.
"Pipeline infrastructure has been impacted domestically in the US, along with export infrastructure for crude and products," said a North Sea trader.
The recent strength in the Brent complex, and the resulting widening of the Brent-WTI futures spread, had led to expectations of a big increase in US exports to Europe, which would have likely put downward pressure on differentials for North Sea grades.
The front-month Brent/WTI futures spread was assessed at $5.90/b by Platts on August 29, the widest since August 13, 2015, before retreating slightly to $4.91/b Friday.
"We were expecting larger-than-normal WTI imports into NWE and a lot of that will be delayed due to export infrastructure being non-operational," said the trader.
Traders also said the potentially bullish impact of a reduction in US flows to Europe would be countered by the bearish impact of reduced refinery runs as NWE refineries underwent Autumn turnarounds.
"There is maybe a bit less oil [coming from the US to NWE] but not a significant amount," said a second North Sea trader. "There is no shortage of oil at the moment and [lower] refinery runs are having the biggest impact. So I don't see any material loss in oil coming this way."
While refinery closures would normally be bearish for crude markets, as the USGC is not typically a large importer of North Sea grades the potential negative impact on North Sea would appear to be limited from that perspective.
As a result of this, the impact on the sour crude market was likely to prove more significant than on the sweet market.
"The US Gulf Coast imports more sour than sweet so this will impact sour more. Light sweet barrels will continue to flow to the US East Coast as normal, maybe even more than before with the current [high] margins," said a third North Sea trader.
According to West African crude traders, the impact of Harvey on Nigerian differentials was mixed, with the temporary drop in US refining capacity being weighed against the potential for already produced US barrels to come to NWE and compete for market share with Nigerian barrels.
"The margins [on WAF crude] are good because you have four million b/d capacity offline but you have other refineries running at capacity -- so that means a net loss for crude capacity overall, so WAF grades are coming under pressure," said a WAF trader.
Another WAF trader said some of the displaced US crude, unable to be used in the Gulf Coast, was also likely to be finding its way to Europe and providing competition for Nigerian crudes in particular.
"US crudes are under pressure and that will push them into Europe to clear," said the trader. "I think the refinery damage is more long-lasting than export infrastructure and it seems [some] European refineries are happy to wait for that."
