The physical North Sea crude oil market's premium to the paper market has fallen steadily this week on a much weaker North Sea market, traders said Friday.
The front-month dated versus frontline (DFL) swap was assessed down $0.06/b at flat Thursday, its lowest in six weeks. It was last lower on January 2 at minus $0.07/b, Platts data showed.
The falling DFL is partly due to a narrowing structure in futures, with front-month versus second-month ICE Brent futures settling at $0.21/b Thursday, the narrowest spread since January 2.
The front-month DFL swap was trading at $0.03/b early Friday morning.
The April DFL was also trading at flat Thursday compared to plus $0.06/b earlier in the week, but no trades were seen Friday morning.
Sources said the DFLs were falling because of the persistent weakness on the physical North sea market.
"DFLs have come off a lot," said one trader, attributing the move to the softening physical North Sea market this week. "North Sea grades are still a bit overvalued. I think the Trafigura bid was an outlier -- February is off the board already."
Trafigura Thursday bid for a February 24-26 loading Forties cargo at Dated Brent plus $0.65/b without finding a seller, showing a lack of availability compared to March. A March 8-10 loading cargo traded at Dated Brent plus $0.20/b Wednesday.
The North Sea market has weakened this week on expectations of less arbitrage fixtures out of the region compared to February.
One VLCC fixture was reported Thursday, an early March loading Forties cargo for Shell, to South Korea. However, some traders believe this is only a moved date for what would have been a late-February loading VLCC, after many Forties cargoes were deferred.
"I think it is just the same barrels, and people are mixing it up," said one trader Friday.
Crude demand within Europe is expected to be lower in March with Spring maintenance in full swing, albeit with less capacity brought offline than last year.
Margins have improved significantly since mid-January as crude differentials have softened, but not enough to boost demand, according to one refinery buyer.
"It's not enough for anyone to increase runs," he said. "Overall demand will be lower in the coming months."
