Sour crude and time spreads.

The continued strength of the sour crude complex continues as we ease into another potential OPEC output cut in March. At the moment, it is not just middle east crude that is leading the charge. European and US sour crude differentials to sweet crude is also at its narrowest ever. When analysing this, we have to take into account the massive distortion in WTI as this is normally a sweet benchmark. Rather, we should look at a more suitable replacement for sweet in US, which is LLS( Louisiana light sweet).

Brent-Urals differential

LLS-Mars Blend differential

Usually, if Gasoline cracks are strong, sweet crude will generate greater demand than sour crude as the yield on Gasoline is much higher. This time round it does not seem to be the case as OPEC output cuts weigh on more reduction of sour crude availability. I suspect now that the massive amount of crude oil in storage are mainly sweet crude and at some point, it would become viable to draw on these stocks vs using the more expensive sweet crude. SFOT will endeavour to find out the potential of this happening. In the mean time, SFOT is beginning to favour going long Brent timespreads as a function of very strong Dubai spreads in the middle east. Otherwise, it should be a quiet week for today marks the start of IP week in london. Good luck to the party-goers!

Brent Jun09-Dec09 spread