Analysis: Weaker distillate cracks begin to pressure Nigerian crude oil grades

The downward trajectory of distillate crack spreads in Europe since mid-November is starting to put pressure on Nigerian crude oil grades Forcados and Bonga, traders said. With the Nigerian January export loading programs for Forcados, Bonga and Erha quite large, sources said a slowdown in demand for distillate-rich grades will make it difficult for crude barrels from Nigeria to clear into Europe.

“With freight rates still expensive for WAF barrels to Europe and large volumes of crude available, I expect differentials on Nigerian grades to drop,” said a WAF market participant. High volumes of crude from Nigeria circulating around Europe are beginning to lead to a weakening in demand for January loading cargoes, which will put further pressure on crude from the WAF region, sources said.

Across the December trading cycle, Nigerian light sweet grades Forcados and Bonga saw price differentials rise around 35 cents/b due to strengthening distillate crack spreads in Europe. This saw the spread between Nigerian distillate-rich and gasoline-rich crude widen significantly, with the spread between Forcados and Qua Iboe reaching 25 cents/b by mid-November and the end of the December stem, the widest it has been since June 2015.

Since then the spread has remained largely flat, with S&P Global Platts assessing the spread at the same value Thursday, with Forcados and Qua Iboe unchanged on the day at Dated Brent plus $1.40/b and Dated Brent plus $1.15/b respectively. With demand for distillate-rich grades starting to become more subdued, traders said they were now expecting the spread between these grades to begin to narrow.


In the ultra-low sulfur diesel complex, cash differentials have weakened across the board this week amid expectations of healthier availability of the product in December thanks to open arbitrage routes from the Persian Gulf and the US Gulf Coast. The alleviation of tightness in the European ULSD market also meant that the physical cracks for ULSD were narrowing. The physical crack of FOB ARA ULSD barges versus Dated Brent dropped $1.34/b to a one-month low of $17.42/b Thursday and marked a sharp retreat from the five-year high of $24.46/b reached November 15.

Lower diesel prices also had a knock-on effect on the gasoil market by reducing demand for desulfurization. The desulfurization spread — the spread between 10 ppm diesel CIF Med cargoes and 0.1% gasoil CIF Med cargoes — narrowed to $4/mt Thursday from $8.50/mt Wednesday, having traded above $6.50/mt since July 2. “At present the difference between 0.1% and 10 ppm is not big enough [to prompt desulfurization demand],” one trader active in the Mediterranean said. “0.1% needs to come off.”

Lower desulfurization demand added to a lackluster demand environment in the European gasoil complex. Demand for gasoil was still slow to pick up, one trader active in Switzerland said Thursday, “despite large falls in outright prices [for gasoil].”