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Physical Oil Traders Are Desperate for Crude


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 U.A.E.

“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 specializes 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 $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 Co. and Ineos Group — was willing to pay a $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 U.S., Heavy Louisiana Sweet 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 crude prices in Houston, a critical indicator of export demand, trades at $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 U.S. 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 U.S. 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 $3.25 a barrel premium to Dubai benchmark price this week. Traders say that’s highest since at least 2013. Oman crude futures are still more than $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% 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 Ltd. in London.


2 Comments on "Physical Oil Traders Are Desperate for Crude"

  1. Robert Inget on Sun, 19th May 2019 9:58 am 

    As markets tighten so will pipeline disruptions,
    tanker sabotage, drone attacks, hot wars, of course un-affordable final pump prices.

    The list grows daily; Iran, Venezuela, North Sea,
    Eastern Europe*, including Russia, Libya, Saudi Arabia.
    *(Contaminated crude)

    #1) A pervasive myth, our domestic supply makes US almost ‘energy independent’.
    The US burns up 20 Million Barrels daily.

    IF, if this Wednesday’s EIA report reflects a huge deficit at a time of year that we should be ADDING
    to storage, short sellers will blame anyone but their own poor judgment.

    #2 problem: So called ‘shale’ or ‘tight-oil’ is really
    ‘liquid gas’ to varying degrees and percentages.
    Unsuitable t refine to diesel or jet fuel.

    #3 US energy people, alarmed by Chinese pressure to relieve the US of Canad’s oil sands forcing Canada to enlarge an export pipeline to BC tanker ports, are making counter-moves to
    revive (on an emergency basis) Keystone XL.
    “The Keystone XL Project is a proposed 36-inch-diameter crude oil pipeline, beginning in Hardisty, Alberta, and extending south to Steele City, Nebraska. This pipeline is a critical infrastructure project for the economic strength and energy security of the United States”.

    Up-shot; The US and China will be fighting over
    Canadian oil.

    Canada, in case you’ve forgotten, just got steel and aluminum tariffs removed.
    A move on the part of the Trump Administration to curry favor #1 supplier, #2 supplier, #3 Supplier,

    Canada: US$64.3 billion (39.5% of total US imported crude).

    Saudi Arabia: $21.9 billion (13.4%)
    Mexico: $14.7 billion (9.0%)
    Iraq: $12.1 billion (7.4%)
    Venezuela: $10.6 billion (6.5%)
    Colombia: $6.6 billion (4.0%)
    Nigeria: $5.1 billion (3.1%)
    Ecuador: $4.2 billion (2.6%)
    Brazil: $3.9 billion (2.4%)
    Angola: $2.5 billion (1.5%)
    Algeria: $2.2 billion (1.3%)
    Russia: $2.1 billion (1.3%)
    Kuwait: $1.9 billion (1.1%)
    Norway: $1.7 billion (1.1%)
    United Kingdom: $1.5 billion (0.9%)

    This is last year’s list.
    Remove just Venezuela (6.5%)
    and as you can see, we are already in deep doo.

    Saudi Arabia simply CANNOT (ever again) supply the US with anywhere near 13% of our requirements.
    I don’t really believe KSA’s cutbacks were were by choice. Do you?

    Mexico, once 9%, is currently a Net Importer.
    (from the US)

    Nigeria’s exports are hampered by almost daily
    pipeline cuts. Shell declared FM (force majeure)
    and says it will leave Nigeria.

    As much love Iraq has for America destroying their country, Iraq may still join with Iran in any trade or hot war with the US. Another -7%..

    Angola’s oil is ALL pledged to China for debt servicing. -1.5%

    Ecuador’s imports are secure only because Ecuador uses USD’s as national currency. Ecuador is deeply indebted to China, so that too could change.

    Then there’s music to ears of the Peak Oil gang.
    Norway is getting out of the oil bidness.
    Just Google North Sea production and see why.

    Most imports now coming into the US are from the “Nation of Unknown”. Doubtless, rebranded Iranian crude.

  2. Davy on Sun, 19th May 2019 10:03 am 

    “#1) A pervasive myth, our domestic supply makes US almost ‘energy independent’.
    The US burns up 20 Million Barrels daily.
    IF, if this Wednesday’s”

    Bobby, how much of that is later exported as finished product? Are we being deceptively anti-American again?

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