The world’s physical oil market runs hot, offering a lift to bulls. Costs for cargoes arriving at poil refineries in Asia in a few months’ time have been revitalizing emphatically all around the world up to this point this year. The delay between when those shipments are bought and when they’ll arrive at the world’s top bringing in locale implies the traders are adequately taking a view on how the current omicron outbreak will work out, particularly in China.
“The oil market is unbelievably resilient, and bulls are in full control,” said Tamas Varga, an analyst at PVM Oil Associates Ltd. “The physical crude market is way over the forward or futures contracts. It implies genuine prompt tightness.”
Their upbeat outlook is further underpinned by the fact that two further demand headwinds — the Winter Olympics in Beijing and the Chinese New Year — will also be out of the way when the barrels arrive.
Demand globally has proved stronger than expected as the latest coronavirus variant inflicts a softer hit to the economy than anticipated, Fatih Birol, the executive director of International Energy Agency said Wednesday, mainly due to “milder Omicron expectations.” Supply disruptions have also helped, he said.
Spot differentials of Abu Dhabi’s Murban crude to be shipped in March surged by more than $1 per barrel, while Russia’s Sokol crude, supplied from Sakhalin Island in the east of the country, fetched a premium of about $5.60 a barrel above its benchmark, according to traders. That’s a gain of $1.50 in the space of a month.
The resulting market strength is apparent in cargoes loaded from regions including Russia’s Far East, the Middle East, the North Sea, West Africa, the Baltic Sea and the barrels from U.S. shale producers.
Refiners in China, South Korea and India are snapping up millions of barrels of more expensive light-sweet U.S. crude that’s due to arrive in April.
In Europe, traders are already paying hefty premiums to secure sweeter varieties that are easier to refine after Libyan supplies of such grades tightened on a spate of disruptions. Premiums for Forties, which often sets the regional Dated Brent benchmark, are at a two-year high. Ekofisk, another key benchmarking grade, is higher than at any time during the pandemic. In the U.S., North Dakota’s Bakken crude is trading at the strongest level in 20 months. Libya was poised to restart oil exports from two key western ports earlier this week after militias ended a blockade of pipelines, but there have been disruptions to exports too.
But the strength appears to be stretching beyond the market for light, low sulfur barrels that are similar to Libya’s. Even Russia’s flagship Urals grade — which is higher in sulfur — is rallying too, and traders in Europe report strong demand across the continent. Oil futures have climbed about 9% so far this year, fresh from its biggest annual gain since 2009 as the reopening of economies spurs global consumption despite the rapid spread of omicron.
Forward Curve The physical-market strength is mirrored in the futures market’s forward curve. The derivatives are in a pattern called backwardation where near-term prices command a premium to later ones.
Back in 2020, the nation’s aggressive approach to combating the disease was a major contributor to global consumption weakening. So any significant restrictions this time around may yet hurt demand. There are multiple flight restrictions to fight omicron in different countries, and signs across Asia of thinning traffic, which would feed through into weaker prompt fuel demand. Buying will also soon start to be affected by seasonal oil refinery maintenance, something that traditionally lowers demand.
Still, there’s plenty of risk that the bullish outlook is too optimistic. The virus is still casting a pall of uncertainty. China has locked down some cities and world’s largest importer is attempting to contain a resurgence of Covid-19 virus variants. Brent oil’s so-called prompt spread touched 77 cents a barrel in backwardation on Thursday, compared with 43 cents at the end of last year. The equivalent for West Texas Intermediate was 67 cents, compared with 33 cents at the end of 2021. Dated to Front-line swaps that are used to hedge physical cargoes have also rallied strongly over the past month.
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