Norway’s Johan Sverdrup crude fell to a two-month low July 24 as it continued on a sharp downward trajectory with expectations for further weakening ahead, as market participants described a bearish environment with alternative grades eating into demand prospects and a strongly backwardated Brent complex punishing prompt loaders.

Platts, part of S&P Global Commodity Insights, assessed Johan Sverdrup FOB Mongstad at an 88 cents/b premium to Dated Brent July 24, its lowest value and the first time it has fallen below the $1/b mark since May 21.

The differential has now fallen over $2/b over the previous 10 pricing sessions July 10-24, with elusive demand heralding a sharp change in fortune for the medium sour grade.

Over the week, market participants had said there was little interest seen in offers around the $1.20/b mark for third-decade FOB August-loaders during afternoon European trading, and Unipec emerged in the July 24 MOC session to offer a cargo of Johan Sverdrup on a CIF Rotterdam basis for arrival Aug. 23-27.

This was the first time the Chinese major had ever placed an indication for the Norwegian grade in the Platts Market on Close assessment process — which was left outstanding at a $2/b premium to Dated Brent.

“The third decade is a bit long and [there] will be pressure on differentials for sure, no surprise [that] no one bought the Unipec cargo,” a source said.

Even with heavy length concentrated around third-decade August cargoes, traders were in agreement that the differentials were in a contango structure, where cargoes further out are pricing higher than their prompter counterparts — suggesting even more pressure on the second decade, with first-decade loaders having mostly cleared.

“The prompter is even lower, a bit of an overhang there in general,” said a second source, pegging value for second-decade loaders below the $1/b mark. “Most shorts are plugged for that period.”

“A contango [structure] is reasonable [with] both Johan Sverdrup and Guyana facing much pressure,” said a third source — Guyana crudes are often touted as a close alternative grade for Johan Sverdrup. “I think differentials still need to come off.”

The sharp turn in demand prospects, especially with bitumen season still ongoing, had caused some confusion when Johan Sverdrup differentials first began to struggle, with market participants saying there was a strong divergence seen across indicative values in the week to July 18.

Now, sentiment had coalesced around the increased availability of alternative grades from Latin America and an ongoing strongly backwardation structure across the Brent paper complex as the reasons for the lack of buyers.

“JS is always a bit difficult to read, but usually it’s a function of JS becoming too expensive, and people opting for alternative barrels quickly,” said the second source.

Little alternative availabilities on the prompt had previously been cited as a factor behind Johan Sverdrup differentials surging above the $3/b mark for an extended bull run between June and mid-July. The extended period of elevation, however, had given participants time to arrange flows of trans-Atlantic medium sour grades into Europe, even with their trading cycles significantly further out.

As such, “fundamentals haven’t changed, it’s just very difficult for grades to trade at big premia when [the] Dated structure is so strong,” said a fourth source — backwardation across the North Sea Dated strip continues to hover at elevated levels, albeit having fallen back from a three-month high reached July 18.

“JS rallied because of a tight period, people bought ahead, and then prompt cargoes struggled [because] of Dated structure,” the fourth source added.

As Johan Sverdrup continues to seek a floor, the sweet-sour spread within the North Sea complex continues to widen, even with its sweet counterpart Ekofisk under unusual pressure. Johan Sverdrup was assessed at a 99.5 cents/b discount to Ekofisk July 24, its widest discount since May 21.
Source: Reuters