Physical oil market gains suggest more support for futures rally


A maze of crude oil pipes and valves is pictured during a Department of Energy visit to the Strategic Petroleum Reserve in Freeport, Texas, United States, June 9, 2016. REUTERS / Richard Carson

LONDON / SINGAPORE / NEW YORK, June 22 (Reuters) – Crude oil values ​​in many parts of the world are rising on stronger demand and tighter supply, suggesting physical markets are catching a rally at term and provide more basic price support, traders and analysts say.

Brent futures rose more than 40% in 2021, boosted by production restrictions led by the Organization of the Petroleum Exporting Countries and its allies, and hopes for demand to recover. But, until recently, physical markets were lagging behind, traders said.

A lack or limited arbitrage opportunities to send crude from the Atlantic Basin to Asia and from the United States to Europe have also helped push up crude values, meaning that each region is effectively trading its own. offer.

The physical rally in crude is reflected in the strengthening of time spreads on Brent futures. The six-month Brent spread widened to over $ 4 a barrel, the highest since March, suggesting strong demand for a quick supply.

“I think the physical crude market is doing well,” said Scott Shelton, US-based energy specialist at United ICAP.

“The Brent spreads up front have also hit new highs and that tells me that the physical market is catching up with futures and making it look like oil is not a hedge against inflation and is definitely worth it. worth it. “

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 ratings like Forties, while posting less dramatic gains, increased in June.

Demand for BTC Azeri light crude oil, which is trading near year-long highs, has recently increased amid wider margins for petroleum products in the Mediterranean.

“The physical seems to be catching up with the future,” said a North Sea trader. “There is strong support for the market.”

SEPARATE KINGDOMS

Asian refiners pay the highest premiums for crude oil from the Middle East and Russia in about a year, due to firm demand and more expensive imports from the West, sources said. Of the industry.

Importing crude from Europe, West Africa and the United States is currently not profitable, as the premium for Brent over the benchmark for Dubai crude has widened, remaining below above $ 3 a barrel in June.

“I think Brent can get stronger, now the laggards in the Atlantic basin are finally getting stronger like the Mediterranean and West Africa,” said a Singapore-based trader.

The Brent-Dubai gap at this level “effectively separated global crude flows into smaller macro-regional trade areas,” JBC Energy analysts said in a report on Friday.

“We expect that the continued rise in differentials is still far from reaching its full potential, with Chinese purchases having significant untapped capacity,” JBC said.

In the United States, the physical qualities of crude have remained fairly stable over the past few weeks and have been supported by rising refinery processing rates ahead of summer demand.

Weekly refinery utilization rates in the United States over the past week have reached 92.6%, the highest since January 2020, according to data from the US Energy Information Administration.

The lack of US crude exports due to the low profitability of overseas oil shipments helped to support the spreads in other regions.

The discount of US crude futures to Brent – the key measure of the profitability of overseas oil shipments – fell on Monday to $ 1.64 a barrel, the lowest since November. It has since widened slightly.

“Right now, it’s that simple that the world doesn’t want bad barrels,” said an executive at one US producer. “All the barrels in North America are flowing towards the refiners. “

Reporting by Alex Lawler, Florence Tan and Devika Krishna Kumar; Additional reporting by Noah Browning; Editing by Edmund Blair

Our Standards: Thomson Reuters Trust Principles.


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