LONDON: The physical oil market, in which millions of barrels of crude are bought and sold each day, is screaming for more supply in the run-up to a pivotal meeting of Opec+ producers this week.
Whether it’s in the North Sea, the Cushing storage hub in Oklahoma, or the Middle East, futures and swaps in the world’s leading pricing locations are trading deep in a pattern called backwardation.
In short, it means traders are willing to pay big premiums to secure physical barrels. The structure wouldn’t look out of place in a US$100 (RM415)-a-barrel market.
At the heart of the tightness, the Organisation of Petroleum Exporting Countries (Opec) and allied nations are keeping millions of barrels off the market when demand in the world’s big consumption centres is coming back from Covid.
At the same time, the producer alliance has a tricky decision to make given the threat of new virus variants, and uncertainty about when the US might ease sanctions on Iran, freeing the nation’s exports.
“The physical market is very tight as you have the trifecta of all the big refining centres buying, ” said Kitt Haines, an analyst at Energy Aspects Ltd.
“With Brent at around US$75 (RM311.4), Opec+ will take a long hard look at how tight the market is, especially with Iran not looking like it will be back anytime soon.”
In the North Sea, home of the Dated Brent benchmark that’s central to many oil transactions, prices are getting stronger despite an increase in regional cargo loadings coming next month.
Bids for cargoes have been dominating a pricing window run by S&P Global Platts. On Friday, Royal Dutch Shell Plc sought Forties, often a grade that sets benchmark North Sea prices, at a premium of US$1.10 (RM4.57) a barrel above Dated Brent, the highest in a year. Traders report burgeoning demand from local refineries as mobility recovers. Differentials for key Nigerian grades have also made significant gains.
“Refiners are increasing runs, particularly in Europe, so there is more physical demand and this is pushing up differentials as buyers compete for ‘local’ grades, ” said Jonathan Leitch, London-based director of consulting at Turner Mason & Co.
“Looking ahead, the tightness in the physical market will be a further confirmation for Opec that demand really is growing strongly and that there is certainly a market for additional crude.”
But it’s in timespreads that market tightness looks most apparent.
West Texas Intermediate crude for August was 70 US cents (RM2.90)-a-barrel above September contracts on Monday, a very high level by historical standards. Equivalent contracts for Brent were about 75 US cents (RM3.11).
Dated to Front Line swaps, contracts to hedge – or bet on – physical Brent prices were at 40 US cents (RM1.66))a barrel, close to the strongest since December 2019.
Likewise, backwardation in prompt swaps for Dubai crude, a benchmark for barrels that make up the baseload of feedstock for Asian refineries, widened to the largest since January 2020 earlier this month.
That strength may be as much about supply-side dynamics as growing consumption. Chinese demand is continuing to recover from the impact of the virus, and physical market buying from India is starting to pick up following a vicious second wave that had hobbled its economy. However, the picture elsewhere remains mixed, especially parts of South-East Asia including Malaysia, which just has extended its lockdown, hurting consumption.
A soaring premium for Brent crude over Dubai oil has restricted supplies flowing into Asia from the Atlantic Basin as buyers avoided pricey Brent-linked barrels flowing in from places such as North Sea and West Africa.In the United States, refiners have steadily increased processing rates to meet rising demand from motorists, draining domestic supplies of light crude. Analysts forecast inventories at the key storage hub in Cushing could fall even further as shale producers heed investors’ calls to restrain spending for new production.
The resulting tightness in supplies is supporting prices of heavy oil from Canada to Colombia, according to data compiled by tatesBloomberg. It’s also making United States crude so pricey that it’s hampering overseas sales.
Such is the shift that some American refiners have been forced to lock in supplies from Asia, such as Sokol crude from eastern Russia, that’s helped lift spot differentials of the variety to the highest since 2020.
“United States refiners competing for barrels usually absorbed by Asian refiners is creating an illustration of a tight market, ” Grayson Lim, a senior oil analyst at FGE in Singapore. “How tight the actual physical market will be in Asia really depends on the outcome of the Opec+ talks involving the August target output later this week.”
Market observers widely expect that a hike of some kind will be agreed when Opec+ meets this week, with the extra supply hitting the market in August. All but two of 19 analysts, traders and refiners in a global survey by Bloomberg News predicted that the coalition will tap its sizable spare production capacity.Yet the average increase they forecast for August was about 550, 000 barrels a day - barely a quarter of the global supply deficit that Opec+ itself anticipates during that month.
“Crude fundamentals are on a tear at the moment, signaling a tight market in all the relevant metrics, ” said Eugene Lindell, an analyst at consultant JBC Energy GmbH. “The tightness we are seeing is the logical consequence of demand exceeding supply for most of this year on account of the Opec+ production cuts and a successful vaccination campaign.” — Bloomberg