The August delivery trade cycle for medium sour crude Mars saw its strongest average differential since the June 2020 trade cycle, as a tight sours market and ongoing efforts to refill the US strategic petroleum reserve have supported values.
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Register NowThrough the August delivery trade cycle, from June 26 through July 25, the front-month differential for Mars crude averaged a $1.43/b premium to cash WTI, the strongest front-month differential averaged through a trade cycle since the June 2020 trade cycle. This saw Mars average a $2.43/b premium to cash WTI. However, while the June 2020 delivery trade cycle, from April 27 through May 22, 2020, saw high differentials for crude grades amid particularly low futures prices, used to help underpin traded values, the August 2023 cycle saw higher differentials for different factors.
Tight sour crude supply global has supported differentials for sour grades, even causing some buyers in certain regions like Mediterranean to look at purchasing sweet grades in lieu of their regular sour purchases. In early June, Saudi Arabia made the move to voluntarily cut 1 million b/d of crude production in July, and then extended into August, on top of 3.66 million b/d of collective OPEC+ quota reductions implemented since October 2022. As Saudi Arabia, and OPEC more broadly, produce many sour crude grades, such reductions in output can markedly tighten sour supply globally. Russia too announced they would lower crude exports in August by 500,000 b/d. Additional supply outages have occurred around the world, including the loss of 450,000 b/d of Iraqi Kirkuk and Kurdish Blend Test sour crudes as exports remain suspended from the Turkish port of Ceyhan, while Iraqi oil flows out of Turkey were halted in late March and have not resumed.
The tight sours environment has support values for certain oil products like high sulfur fuel oil which correlate closely to sours prices like Mars. Furthermore, major exporters out of the Middle East like Saudi Arabia and Iraq have made moves to increase the most recent official selling prices for their export grades, further supporting differentials for sour grades such as Mars.
On the demand side, the ongoing effort by the US Administration to refill the strategic petroleum reserve after heavy downdraws in 2022 have provided further support to Gulf of Mexico sour grades like Mars, particularly given the stipulation by the US government to purchase US sour crudes in the solicitations put out in 2023. By August 2023, the US Department of Energy will have purchased a total of 12 million barrels of US crude as part of the SPR refill effort, with another solicitation recently issued for 6 million barrels of US produced sour crude for October and November delivery. This is part of a broader strategy by the US DOE to refill the SPR that also includes the cancellation of 140 million barrels in congressionally mandates sales scheduled for fiscal 2024 through 2027.
While it remains to be seen if these strong differentials remain for Mars and other sour grades as the year progresses, the specter of hurricanes will continue to hang over the US Gulf Coast market through the formal close of the hurricane season on November 30. Typically, such elevated differentials observed in the August trade cycle for Mars are only seen over short period during hurricane disruptions to Gulf of Mexico production. The National Oceanic and Atmospheric Administration in May predicted a near-normal 2023 Atlantic hurricane season with a range of 12 to 17 named storms, with only about half that number becoming hurricanes. The report was caveated, however, with the high potential for El Nino – which would signal weaker trade winds – to develop, potentially leading to more suppressed Atlantic hurricane activity.