You are here
Physical oil traders are desperate for crude
[LONDON] From Colombia to the North Sea, the Middle East to Texas, the global market for crude cargoes is becoming tighter by the week as supplies grow more constrained and risks to production spiral.
Prices for actual barrels from the North Sea, Asia, and the Americas are now trading at the highest in half a decade. Key price spreads that show how urgently oil refineries need benchmark Brent barrels are soaring.
It's little wonder. The list of known supply curbs and disruptions is growing, and traders are now also having to contend with mounting tensions in the Persian Gulf - the world's largest export region.
On Tuesday, drones attacked and temporarily halted a giant Saudi Arabian pipeline. Two days before that, four oil tankers were sabotaged at the key refueling port of Fujairah in the United Arab Emirates (UAE).
"We have now reached the stage where crude differentials globally and across all slates are strong,'' said Greg Newman, co-CEO of Onyx Commodities, which specialises in energy derivatives.
"There is only one conclusion: the prompt market is short of oil. With the current situation, the outright price should continue to strengthen until demand suffers."
Brent crude futures for July are now trading close to US$3.40 a barrel more than for December, the highest premium in the life of those two contracts, according to ICE Futures Europe data. That means traders are willing to pay more to obtain supplies as soon as possible.
That same strength is also showing up in North Sea derivatives markets. Contracts for difference have been trading in a backwardated structure - meaning more immediate prices are higher - that has strengthened markedly over the past two weeks, according to PVM Oil Associates data.
The Dated to Frontline swap, or DFL, contract settled at its strongest since 2014 on a rolling basis, according to Bloomberg fair value data.
It's the same picture in the markets where traders are buying physical supplies.
In the North Sea, Petroineos - the trading and refining venture between PetroChina and Ineos - was willing to pay a US$1.20 a barrel premium to a benchmark to buy Forties crude on Thursday, according to traders and brokers monitoring a pricing window run by S&P Global Platts. Nobody was willing to sell at that level. The grade hasn't traded that strongly since January 2014, data compiled by Bloomberg show.
In the US, Heavy Louisiana Sweet (HLS) crude rose to the highest since 2014 this week.
HLS is now the most expensive crude in the Gulf Coast complex. Buyers in America are seeking to substitute the loss of sanctions-hit Venezuelan supply and production curtailments from Canada.
Meanwhile, West Texas Intermediate (WTI) crude prices in Houston, a critical indicator of export demand, trades at US$7.50 a barrel above benchmark WTI crude, after reaching a nearly three-month high on Wednesday.
Colombia's Vasconia crude recently traded at a 5-year high.
One place where that strength isn't showing up is at Cushing, the US trading hub for WTI. Inventories there have increased for the past four weeks as shale production swells and the ability to get supplies out of storage tanks remains constrained.
Traders in the US have also been gearing up for further stockbuilds ahead, with key timespreads weakening for the rest of 2019 in recent days.
But in Asia, a tender for Al-Shaheen crude was awarded at an average of about US$3.25 a barrel premium to Dubai benchmark price this week. Traders say that's the highest since at least 2013.
Oman crude futures are still more than US$3 a barrel above Dubai swaps while all Middle Eastern barrels - as well as Russian grades like Sokol - are trading strongly.
One question some traders are asking is whether the headline price of oil - the front-month futures contract - reflects this strength.
While futures in New York has gained almost 40 per cent this year, and close to that in London, both benchmarks remain several dollars a barrel below their 2019 peak, set in late April.
However, at least in the case of Brent contracts that reflect international trading, underlying price indicators for physical barrels continue to look bullish.
"The steep backwardation in Brent and Dubai curves and the strength in physical differentials globally, particularly for sour crudes, point to one of the tightest physical markets since at least 2011," said Amrita Sen, chief oil analyst at Energy Aspects in London.