ICE Brent futures surged to their highest in more than 2 years on Monday, crossing the $65/bbl mark due to the unplanned shutdown of the Forties crude oil pipeline for several weeks for repairs. The pipeline is a major artery which carries up to 450 kb/d from the North Sea to Scotland, with the Forties grade making up the largest stream in the dated Brent benchmark.
The shut-in of Forties production and subsequent deferment of cargoes in the North Sea is expected to weigh on VLCC demand in the Atlantic Basin, affecting the longhaul trade to the East. An average of 4-5 Hound Point-Far East fixtures are seen every month, with 3 fixed for December loading so far. Cargoes are typically shipped to South Korea or China. More significantly, the corresponding jump in the Brent-Dubai EFS spread to a 1.5-year high is expected to have wider implications for the crude tanker market as WAF crudes are increasingly unattractive to Asian buyers. For the VLCCs, December ex-WAF cargo volumes were fairly disappointing for owners with at least 5 fixtures failing subjects after OPEC’s agreement to extend the ongoing production cuts until the end of next year. Suezmaxes trading in the Atlantic Basin may see some gains as more WAF crude likely to be diverted to Europe to meet winter demand, boosting cargo demand.
The ongoing widening of the Brent-WTI and Dubai-WTI spreads are also expected to significantly improve the economics of moving US crudes to the East. The Brent-WTI spread is currently trading at around $6/bbl, a level last seen in late September which led to an influx of US/Caribs crude moving to Asia. A potential pick-up in long-haul arb flows from the Americas to Asia and subsequent growth in ton-mile demand remains the bright spot in the depressed VLCC market although we have yet to see any jump in cargo enquiries.