This week, we have seen a good example of the dichotomy between Brent’s futures and the physical market that underpins it. In the physical, it seems that the market has found a floor this week. Equinor and Gunvor were running down the physical premium with good offering, but this has been met with better buying now. On 17 Feb, Glencore, PetroIneos, and Totsa were bidding for Forties and Midland, and we expect some better support here with good refiner buying seen with decent margins. Our view is that for this month, there is not a lot of crude left in loading cycles for the North Sea grades. This leaves Midland’s availability key to the strength of Dated. The cold weather in the US, along with fog issues at ports, could cause some issues here, from what has been some strong export levels from the States.
The 24-28 Feb CFD has seen strong buying from a trade house, which has been buying in particular in good size this week, could point towards a potential bull play for the physical differential this week. This trade house has been buying March structure alongside a major. CFD structure past May, alongside the deferred DFLs, have seen a hands-off week with an obvious wait-and-see mentality from players currently considering the vast amounts of huge moving parts that have helped to tranquilise the Brent futures market. The physical is strengthening to 40-50c in the front, and the backend of April is seeing an implied diff of around 20c, so there is still room for it to rally before it looks expensive.
The front futures fly is still negative, although its recovery gives some credence to the physical strength. It makes more sense to us to be bullish in DFL rolls as these remove the risk from the spread structure, making it harder to have a directional view in the latter months with the future market’s uncertainties. The physical cargo constraints alongside refiner buying prompt us to be long in the 24-28 Feb 3-week roll.
