Whether it’s in the North Sea, West Africa or the Persian Gulf, traders of millions of barrels of crude are seeing little to justify the past fortnight’s slump in oil futures.
Crude on exchanges in New York and London fell as much as 7 percent since late April despite the temporary halt of a pipeline delivering millions of barrels a month of Russian oil to Europe’s refiners. The cessation added to a long list of supply disruptions and curtailments elsewhere in the world.
“There is no true sign of weakness in the physical market,” said Olivier Jakob, managing director of consultant Petromatrix GmbH in Zug, Switzerland. “You have lower exports from Venezuela, you’ve got sanctions form Iran, Libya which is still a risk.”
While futures sold off against a backdrop of concerns about the U.S.-China trade dispute, markets for physical barrels are anchored to the supply and demand of actual cargoes of oil. And, if anything, those are strengthening.
In Europe, traders are willing to pay higher premiums to secure immediate supplies of Brent crude, a global benchmark grade. The North Sea’s main loading programs next month will be the smallest in years — just before northern hemisphere refineries start purchasing more oil for summer processing. Traders in West Africa and the Mediterranean also report bullish markets.
Likewise, Asian refiners have been paying record premiums to secure heavy crude from Iraq that should help cover them against declining flows from Iran. They also secured extra crude from Saudi Arabia for June, despite the kingdom’s leading role among oil producing nations in restricting supplies.
One fly in the ointment for bulls is the U.S., where production is still expanding and stockpiles continue to swell at Cushing, the nation’s storage hub.
The extra crude the U.S. is producing would normally be coveted by refiners because it has good yields of light petroleum products like gasoline. However, the world also needs other fuels that are more readily made from the grades found in locations like Venezuela, Iran and other parts of the Persian Gulf.
The best indicators of underlying oil-market conditions are so-called timespreads, which reflect the premiums traders are willing to pay to get crude sooner.
“They have certainly strengthened,” said BNP Paribas SA head of commodity markets strategy Harry Tchilinguirian. “Flat price will reflect the underlying trend but on a day-to-day basis can be buffeted by various factors, from fundamental, to geopolitical to financial and finally plain and simple order flow.”
Brent for July costs 81 cents more than for August, according to ICE Futures Europe data. A month ago, the same premium was 40 cents.
There are plenty of reasons to think the tightness in physical markets will persist — at least for a while. Russian crude oil still wasn’t being piped freely to Europe as of May 7, following a contamination crisis that emerged late last month. Similarly, the U.S. has given no signal so far that it will ease sanctions restricting Iran’s exports, while Venezuelan output continues to stay low.
“The question is: what scenario needs to happen for the price of oil to come down? I can’t think of any,” said Fereidun Fesharaki, chairman of industry consultant FGE. “I can’t see Libyan crude output going up and I can’t see the sanctions not being imposed” and those issues are being reflected in the physical market.