LONDON/SINGAPORE/NEW YORK: Crude oil values in many parts of the world are rising on stronger demand and tighter supply, suggesting physical markets are catching up with a futures rally and providing more fundamental support for prices, traders and analysts say.
Brent futures have rallied over 40% in 2021, boosted by output curbs led by the Organization of the Petroleum Exporting Countries and it allies, and on hopes of recovering demand. But, until recently, physical markets lagged, traders said.
A lack of or limited arbitrage opportunities to send crude from the Atlantic Basin to Asia, and from the United States to Europe, also helped drive up crude values, meaning each region is effectively trading its own supply.
The physical crude rally is being reflected in strengthening time spreads in Brent futures. The six-month Brent spread has widened to more than $4 a barrel, the most since March, suggesting strong demand for prompt supply.
“I think the crude physical market is in solid shape,” said Scott Shelton, a US-based energy specialist at United ICAP.
“Brent spreads in the front are also on new highs and this tells me that the physical market is catching up to the futures and making oil look like it’s not an inflation hedge and is actually worth this.”
One of Nigeria’s biggest crudes, Qua Iboe, is worth a premium of $1 a barrel over dated Brent crude, the highest in about a year. North Sea grades like Forties, while posting less dramatic gains, have risen in June.
Demand for light Azeri BTC crude oil, which is trading near one-year highs, has risen recently amid wider margins for oil products in the Mediterranean.
“The physical seems to be catching up with the futures,” a North Sea trader said. “There is strong support for the market.” Asian refiners are paying the highest premiums for Middle East and Russian crude oil in about a year, due to firm demand and more costly imports from the West, industry sources said.
Importing crude from Europe, West Africa and the United States is currently uneconomical as Brent’s premium to the Dubai crude benchmark has widened, staying above $3 a barrel in June.
“I think Brent can go stronger, now the stragglers in the Atlantic Basin are finally strengthening like Mediterranean and West African,” a Singapore-based trader said.
The Brent-Dubai spread at this level was “effectively separating global crude flows into smaller, macro-regional trading realms,” said analysts at JBC Energy in a report on Friday.
“We anticipate that the ongoing surge in differentials is still far from reaching its full potential, with Chinese buying having significant untapped capacity,” JBC said. In the United states, physical crude grades have held pretty steady over the past few weeks and have been finding support from rising refinery processing rates ahead of summer demand.
US weekly refinery utilisation rates in the latest week rose to 92.6%, the highest since January 2020, data from the US Energy Information Administration showed.
A lack of US crude exports due to poor profitability for shipping oil overseas has helped support differentials in other regions. The discount for US crude futures to Brent - the key measure of profitability for shipping oil overseas - shrank on Monday to as little as $1.64 a barrel, the narrowest since November. It has since widened slightly.
“Right now, it’s as simple as the world not wanting barrels badly,” said an executive at a US producer. “All the barrels in North America are flowing in the direction of refiners.”