From the Middle East to Siberia, the North Sea down to Latin America, the prices of physical cargoes of crude oil are rallying hard almost everywhere, underpinning a surge in headline futures markets. Now, though, attention is turning toward just how sustainable the recovery will really be.
Brent crude traded on the ICE Futures Europe exchange has nearly doubled over the past month and is trading above $36 a barrel, while America’s West Texas Intermediate — which dipped into negative territory at one stage — has also soared. All that’s happened because global producers have slashed millions of barrels of output tightening the real supply of oil, while demand has started to recover, led by China.
Those dynamics have allowed multiple crude streams to fetch dollars-per-barrel premiums relative to the benchmarks they trade against, when just a few weeks ago they were being sold at deep discounts. The dramatic turnaround means sellers are getting more for their oil, but higher prices can be self-defeating: enticing producers to ramp up output and quickly destroying margins that refineries are earning from processing crude.
“The early signs of recovery seem to be fueling a rapid re-pricing in parts of the market,” said Richard Mallinson, an analyst at consultant Energy Aspects Ltd. “But a lot of the re-balancing depends on the supply that’s gone offline remaining offline. We’re not there yet, but you could get price levels where a lot of those early shut-ins start to be reversed.”
With the notable exception of the U.S. Gulf, where traders are awaiting an influx of crude from Saudi Arabia, the prices of most physical grades have been rallying for days or weeks. The strongest have tended to be those streams most directly exposed to China, where oil demand has recovered to such an extent that it’s almost back to where it was a year ago.
Russia’s ESPO crude, which is shipped mostly to Asian buyers from the country’s Far East, traded at premiums as high as $3.50 a barrel to its Dubai-crude benchmark this week. By contrast, June-loading cargoes changed hands at discounts of as much as $4.80 to Dubai last month.
Cargoes of another Russian variety — Sakhalin Blend — traded at a discount of $1-$2 a barrel against the Dubai benchmark for August loading, a sharp narrowing from discounts that were at $8.70-$9 just a month ago.
Iraq’s Basrah Light and Heavy crudes for June loading were sold to a buyer in China at a premium of between $4.50 and $4.80 a barrel to official selling prices, according to traders who asked not to be identified. That’s up from $2.50 and $3.50 in May.
In Angola, where China is the main lifter, differentials have risen by about a dollar within the past week, according to traders. The North Sea has gained sharply too.
The strength underscores just how fast the oil market tightened once prices collapsed last month and production began to plunge because of Covid-19 and its devastating impact on consumption of transport fuels. Alongside the demand pickup, OPEC and its allies are cutting global output by almost 10 million barrels a day, and North American drillers have cut rigs at a frantic rate.
“Simply put, OPEC+ led production cuts and global shut-ins are working,” RBC Capital Markets analyst Michael Tran wrote in a research note, highlighting particular strength in most North Sea and West African crude grades.
While the bank was expecting the oil market to flip into deficit by late June or early July, “preliminary indicators are suggesting that balances are cleaning up four-to-five weeks ahead of our anticipated time line, as are prices,” he said.
In Europe, the demand recovery is still well behind Asia’s, though it’s benefiting from some sharply reduced loading programs. The price of Russian Urals crude in northwest Europe has been mostly stable at a small premium to the benchmark during the past week, but nonetheless much stronger than a discount of about $3 a barrel a month ago, according to traders.
The latest Urals loading program for the first five days of June shows a steep drop in exports compared with the same period in May. Exports of Mediterranean CPC Blend crude are set to slump to a 13-month low in June, giving an upward lift to prices.
The bleakest spot for a price recovery remains the U.S. Gulf Coast, where a flood of exports from Saudi Arabia has exacerbated a surplus, adding to pressure on competing offshore grades like Mars Blend.
Onshore, West Texas Sour crude has dropped to a discount of 35 cents a barrel below WTI futures, down from a premium of $3.50 as recently as May 11. WTI in Midland, Texas — the heart of the state’s shale region — has also slumped.
Prices in the Midwest and in Western Canada have been better supported by the supply cuts and demand recovery. Bakken crude is 75 cents over WTI, from a $15 discount in mid-April. Western Canadian Select last week reached the strongest level in data stretching back to 2008.
The wider rally, though, means that some analysts view a short-term pull-back in prices as possible.
“In the very short-term, prices may have accelerated a bit too fast,” said Eugene Lindell, an analyst at JBC Energy GmbH in Vienna. “The situation on the refining side is pretty brutal right now.”
Still, it could be positive for sellers if they maintain supply discipline, he said. Beyond the next two or three weeks, JBC is “ultra bullish” because the production cuts will make the global market “seriously tight.”