After a brief uptick on product cracks to start 2021, European refiners are again seeing coronavirus restrictions bite into margins, with many facing strategic decisions on whether to cut runs, or shift slates to run more economically priced crude grades.
For many refiners in Northwest Europe and the Mediterranean, sour crude grades from Russian and Middle Eastern producers make up a large percentage of baseload buying, but these grades in recent months have been in shorter supply and are more expensive than the more plentiful sweet crude market.
European buyers have seen around 25-30% of monthly allocation cuts from Saudi Arabia and total Urals shipments in February are scheduled at 4.30 million mt, down 1.74 million mt from January, despite the loosening of Russia's commitment to OPEC+ production cuts.
As the market faces another month of tighter sour crude supply, refineries are seeking alternative grades. "With Saudi cuts and lower Russian exports you would certainly expect some switching," a crude trader said. "Slate] switching is happening on a fairly regular basis though -- people are just scrambling for any economics that makes sense, really."
Buyers have turned to Iraq's Basrah grades as alternatives to heavy crude from Saudi Arabia, as favorably priced February official selling prices have encouraged higher flows to Europe, with 18 million barrels of Iraq's three Basrah grades arriving in February, from just 8 million barrels in January, sources suggested.
Johan Sverdrup, WAF grades find favor
Some of the grades finding homes as alternatives to Urals include the North Sea's heavier Johan Sverdrup in Northwest Europe, while in the Mediterranean some refiners are turning to Libya's Es Sider grade, traders said. Kazakhstan's CPC Blend, as a lighter but still sulfurous grade, can also work as an alternative for some refineries, sources said.
"NWE refiners' margins are [lower] and some have switched to buying Johan Sverdrup," a second crude trader said. "Normally Johan Sverdrup sells better into the East, but didn't in February, so its means local refiners take it, and so take less Urals as a result."
North Sea traders have said that the majority of North Sea grades have sold ahead of the release of the March loading programs; however, some of the barrels could have struggled to clear into China due to the maintenance season.
"In China we are approaching the maintenance season -- I mean February-loading cargo will arrive early April," a North Sea trader said previously, adding that the cold weather in the region added a further wildcard to demand.
Availability of Johan Sverdrup is expected to increase further, with field partner Lundin saying Jan. 28 that output rates could reach 535,000 b/d from mid-2021.
However, different timings on trading cycles for some alternative grades and the inability to quickly switch slates will mean this strategy can only happen to a certain degree.
"I think you can maybe tweak it a little, but inherently [some refiners] mainly gain value from running sourer crudes -- and can only switch so much [of their stock]," a refinery trader said, adding that his refinery could only easily switch up to 10% or roughly one cargo of its monthly crude intake.
Some of Europe's baseload requirement is typically met with light sweet Nigerian crude grades; however, with a trading cycle that looks further forward, and a relatively long journey time, slate switching might not encourage refiners to take more West African crude.
"Sour-sweet switching would be supportive of regional grades -- which seems to have happened -- but I don't see much flow from WAF beyond the usual to Spain or Rotterdam," a WAF trader said.
And as overall margins slump, traders also point to the possibility of run cuts, as seen during certain points in the summer. "The poor margins are not incentivising an awful lot of creativity I must say," a third trader said. "Yes, we see some switching but not increased demand overall."
