The Real Oil Market Is Drowning and OPEC+ Deal Can’t Rescue It

The physical oil market, where millions of barrels of real cargoes are traded each day, needed OPEC+’s historic cuts to global crude production months ago.

On Sunday, producer nations pledged to limit output by an unprecedented 10% of global supply. While there’s skepticism the cuts will prove deep enough — demand has plunged by far more — a more pressing issue is one of timing: the real market, the one that underpins headline prices, has a huge glut and the output curbs won’t even begin until May. Before then, it’s pump at will so the curbs won’t really affect physical oil supply for months.

Signs of weakness abound. Key North Sea crude swaps are trading more than $6 a barrel below the headline Brent futures price of about $28 — the biggest discount in almost a decade. The critically important Dated Brent benchmark that shapes the price of millions of barrels of crude was assessed by S&P Global Platts at $20.65 on Tuesday. At the same time, a gauge of U.S. supply is at its weakest since 2009 as the market tries to force supplies into storage.

“In the short-term, the market remains very overwhelmed with misplaced oil,” said Torbjorn Tornqvist, co-founder and chief executive officer of Gunvor Group Ltd., a top oil trader. “Prompt time spreads will continue to be very weak, along with deep discounts for physical oil.”

The most immediate WTI crude future — May — slumped to a discount of $7.29 a barrel relative to June on Tuesday, the deepest discount since 2009 and a sure sign of immediate oversupply. Landlocked grades such as Bakken are still worth less than $10 a barrel as refiners, stuck with fuel they can’t sell, slash runs

Even so, there are pockets of relief. The cash market in the U.S.Gulf has seen prices recover somewhat since Saudi Arabia began raising official selling prices for its crude in May for buyers in the Americas. Differentials for high-sulfur crudes in the U.S. were first to respond, with grades like Mars Blend at premiums to oil futures for the first time in two weeks.

That weakness is particularly acute for crudes that produce a lot of naphtha and jet fuel — parts of the market hit by the global shutdown. Caspian CPC crude is trading at a discount of more than $9 a barrel to the Dated Brent benchmark, based on swaps trades for that market. In the Middle East, Murban oil has trodden a similar path due to its high naphtha content, the Oxford Institute for Energy Studies wrote in a recent report.

There’s no sign that any producer will close the taps before May, meaning millions of barrels of unneeded crude entering the market each day. The new arrangement is from May, Prince Abdulaziz bin Salman, the Saudi oil minister, told reporters on a conference call on Monday in reference to the OPEC+ agreement, adding that all of April was already sold.

Saudi Arabia’s crude exports during the first two weeks of April were around 9.3 million barrels a day, according to tanker-tracking data compiled by Bloomberg. That compares with 6.8 million barrels a day during the same period in March.

“Whatever is happening in April is already happening,” said Saad Rahim, the chief economist at trading giant Trafigura Group. “The barrels are moving, the run cuts are happening. This is the peak of demand destruction. It is going to be too late to stop a lot of barrels from going into storage. What this does is it starts to address the over-the-horizon issues.”

The hit to consumption has crippled refineries globally. Total SA — one of the largest oil refiners in Europe — said last week it might not be able to keep its plants open for another month, while smaller installations from Italy to the U.S. have already closed.

It’s a similar picture in West Africa, where about 20 million barrels of April-loading crude remain unsold, according to traders. The OPEC+ cuts will do little to alleviate that glut in the short-term, said traders active in that market.

It highlights the glut of supply in the so-called Atlantic Basin region, comprising Northwest Europe, the Mediterranean and West Africa.

“The Atlantic Basin will still be drowning,” said Kitt Haines, analyst at Energy Aspects. “Everything will depend on how quickly demand recovers.”

Bloomberg