LONDON / Reuters
As OPEC watches a near 15 percent drop in the oil price in three weeks, important indicators in the physical crude market are flashing signals that the decline might be far from over.
The warnings come not from the heavily traded futures market, but from less transparent trading activity in crude oil and products markets, where key US, European and Russian crude prices have fallen of late, suggesting less robust demand.
Benchmark oil futures have plunged in recent days together with global stock markets due to concerns over inflation as well as renewed fears that rapid output increases from the United States will flood the market with more crude this year.
OPEC, including its Secretary-General Mohammad Barkindo, argues the decline is just a blip because demand is exceeding supply and that prices won’t plunge again to $30 per barrel as they did in 2015 and 2016.
Traditionally, when oil futures decline, prices in the physical markets tend to rise because crude is becoming cheaper and hence more attractive to refiners.
But in recent weeks, differentials in key European and US markets such as North Sea Forties, Russia’s Urals, West Texas Intermediate in Midland, Texas, and the Atlantic diesel market have fallen to multi-month lows.
The reasons tend to be different for most physical grades but overall the trend paints a bearish picture. “Physical markets do not lie.
If regional areas of oversupply cannot find pockets of demand, prices will decline,” said Michael Tran of RBC Capital Markets.
“Atlantic Basin crudes are the barometer for the health of the global oil market since the region is the first to reflect looser fundamentals. Struggling North Sea physical crudes like Brent, Forties and Ekofisk suggest that barrels are having difficulty finding buyers,” he added.
This follows a run-up in US production to 10.04 million barrels per day as of November, the highest since 1970. The increase pushed the United States into second place among crude producers, ahead of Saudi Arabia and trailing only Russia, according to the US Department of Energy.
The Paris-based International Energy Agency said increased US supply could cause output to exceed demand globally in 2018. Forties crude differentials to dated Brent have fallen to minus 70 cents, from a premium of 75 cents at the start of the year as the Forties pipeline returned to normal operations.
Forties differentials are now not far off their lowest since mid-2017, when the benchmark Brent crude price was around $45 per barrel, compared to $62 now and $71 a few weeks ago. In the United States, key grades traded in Texas and Louisiana have fallen to their lowest in several months.
A similar pattern can be observed in the Russian Urals market, one of the biggest by volume in Europe. At a discount of $2.15 to dated Brent, Urals’ differentials in the Mediterranean are now at their lowest since September 2016, when Brent futures were around $40-$45 per barrel.