Oil & Energy
Tight Physical Crude Market, Pointer To Higher Oil Prices
A tight physical supply
in crude markets could send oil prices even higher.
Demand has proven to be more resilient to the effects of Omicron than many analysts had originally thought.
With both the physical and futures markets rallying, and increased geopolitical premium, market observers are looking towards the $100 mark for oil prices.
Prices of physical crude cargoes have rallied this year, signaling resilient global oil demand even in the face of record-high COVID cases in the Omicron wave. Crude grades from the United States, Africa, the North Sea, the Middle East, and Russia have seen a significant increase in their prices in recent weeks, suggesting that the physical demand for oil is tight across the world.
The tightness in the physical crude prices is reflected in the oil futures market where the backwardation — the state of the market signaling tight supply — has increased for both major benchmarks, Brent and WTI.
The tight physical supply of oil points to further gains in the futures market, where Brent Crude prices hit a fresh seven-year high at over $87.80 a barrel early on Tuesday — the highest price for Brent since October 2014.
Part of the rally in recent days was the result of heightened geopolitical tensions in the Middle East and the Russia-West standoff over Ukraine. But the other major driver was the tight supply on the market, with physical cargo prices rallying, outages in major producing countries, and demand resilient to the Omicron wave.
Traders and refiners seem to believe that the feared threat to demand from the new variant was overblown, and are now back to the market buying cargoes much more than they did at the end of November and early December when the impact of Omicron was still a very large looming threat.
Strong Physical Oil Demand
Since the start of the year, prices of crude cargoes that will end up in two or three months in the world’s largest importing region, Asia, have rallied strongly, as refiners are back on the market following some hesitancy at the end of 2021 amid the unknown effects of Omicron on demand.
Consumption is resilient, disproving fears of a new dip, and holding up stronger than many analysts and forecasters, including the International Energy Agency, had predicted.
Global oil demand has proven to be more resilient to the effects of the Omicron variant’s spread than the IEA expected, Executive Director Fatih Birol said last week.
“Demand dynamics are stronger than many of the market observers had thought, mainly due to the milder Omicron expectations,” Birol said, as quoted by Bloomberg.
As a result of this resilient demand, refiners are buying cargoes, which raises the prices of physical crude from every part of the world.
“These are crazy numbers. There clearly is physical tightness,” an oil trader in the North Sea region told Reuters this weekend.
The premiums for the Forties and Ekofisk grades from the North Sea are at their highest in two years. The prices of crude grades from West Africa have also jumped amid low Libyan supply in recent weeks.
The Bakken crude from North Dakota is also trading at its highest level compared to benchmarks in nearly two years, according to Bloomberg’s estimates.
Price differentials of grades from Russia and the Middle East have also increased to the highest benchmarks in several months.
“Buyers are snapping up everything,no matter what grade,” an oil trader from the U.S. tells Reuters.
“The physical crude market is way over the forward or futures contracts. It implies genuine prompt tightness,” PVM Oil Associates’ analyst, Tamas Varga, told Bloomberg last week.
Physical Tightness Reflected In Oil Futures Market
This week, PVM Oil Associates said in a note on Monday that “Positive developments were in focus and there is a genuine belief that physical demand will keep exceeding supply and in return this perceived bullish backdrop will further encourage investors to remain faithful to our market.”
The tight physical market suggests the futures market has further room to rally, traders and analysts say.
“The prompt spreads in WTI and Brent remain elevated at 63 and 74 cents per barrel, thereby signaling rising tightness,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Monday.
”Speculators, a little late to the recent rally, boosted bullish oil bets in WTI and Brent bets by the most in 14 months last week,” Hansen added, noting that the combined net long — the difference between bullish and bearish bets — in Brent and WTI jumped last week by the most since November 2020 to reach 538,000 lots or 538 million barrels. This is still well below the most recent peak at 737,000 lots from last June, he said.
$100 Oil?
With both the physical and futures markets rallying, and increased geopolitical premium, market observers are again posing the question: how far can this rally go?
According to the world’s largest independent oil trader, Vitol, oil prices — at a seven-year-high early on Tuesday—are justified and have further to go.
Triple-digit oil “is in the works” for the second quarter, Francisco Blanch, head of global commodities at Bank of America, told Bloomberg last week.
Demand is recovering meaningfully, while OPEC+ supply will start leveling off within the next two months, Blanch said, noting that Russian supply will level off and it will be only Saudi Arabia and the United Arab Emirates (UAE) that can produce incremental barrels to add to the market.
Of course, risks to the downside haven’t gone away. The biggest unknown and the largest potential headwind to near-term global demand is China, and whether it would continue to apply its zero-COVID policy, BofA’s Blanch said. Large lockdowns in the world’s top oil importer could reduce consumption and potentially, Chinese oil imports.
Refinery maintenance in the spring could also slow down the physical oil market, analysts say.
Yet, the oil rally may not be over just yet, especially if demand continues to reflect just a “mild Omicron effect.”
By: Tsvetana Paraskova
Paraskova reports for Oilprice.com.
The Federal Government has expressed optimism in attracting more investments by International Oil Companies (IOCs) into Nigeria to foster growth and sustainability in the energy sector.
This is as some IOCs, particularly Shell and TotalEnergies, had announced plans to divest some of their assets from the country.
Recall that Shell in January, 2024 had said it would sell the Shell Petroleum Development Company of Nigeria Limited (SPDC) to Renaissance.
According to the Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, increasing investments by IOCs as well as boosting crude production to enhancing Nigeria’s position as a leading player in the global energy market, are the key objectives of the Government.
Lokpobiri emphasized the Ministry’s willingness to collaborate with State Governments, particularly Bayelsa State, in advancing energy sector transformation efforts.
The Minister, who stressed the importance of cooperation in achieving shared goals said, “we are open to partnerships with Bayelsa State Government for mutual progress”.
In response to Governor Douye Diri’s appeal for Ministry intervention in restoring the Atala Oil Field belonging to Bayelsa State, the Minister assured prompt attention to the matter.
He said, “We will look into the issue promptly and ensure fairness and equity in addressing state concerns”.
Lokpobiri explained that the Bayelsa State Governor, Douyi Diri’s visit reaffirmed the commitment of both the Federal and State Government’s readiness to work together towards a sustainable, inclusive, and prosperous energy future for Nigeria.
While speaking, Governor Diri commended the Minister for his remarkable performance in revitalisng the nation’s energy sector.
The Federal Government has assured investors in the nation’s gas sector of the security and safety of their investments.
Minister of State for Petroleum Resources (Gas), Ekperikpe Ekpo, gave the assurance while hosting top officials of Shanghai Huayi Energy Chemical Company Group of China (HUAYI) and China Road and Bridge Corporation, who are strategic investors in Brass Methanol and Gas Hub Project in Bayelsa State.
The Minister in a statement stressed that Nigeria was open for investments and investors, insisting that present and prospective foreign investors have no need to entertain fear on the safety of their investment.
Describing the Brass project as one critical project of the President Bola Tinubu-led administration, Ekpo said.
“The Federal Government is committed to developing Nigeria’s gas reserves through projects such as the Brass Methanol project, which presents an opportunity for the diversification of Nigeria’s economy.
“It is for this and other reasons that the project has been accorded the significant concessions (or support) that it enjoys from the government.
“Let me, therefore, assure you of the strong commitment of our government to the security and safety of yours and other investments as we have continually done for similar Chinese investments in Nigeria through the years”, he added.
Ekpo further tasked investors and contractors working on the project to double their efforts, saying, “I want to see this project running for the good of Nigeria and its investors”.
Earlier in his speech, Leader of the Chinese delegation, Mr Zheng Bi Jun, said the visit to the country was to carry out feasibility studies for investments in methanol projects.
On his part, the Managing Director of Brass Fertiliser and Petrochemical Ltd, Mr Ben Okoye, expressed optimism in partnering with genuine investors on the project.
Crude oil prices recently logged their second monthly gain in a row as OPEC+ extended their supply curb deal until the end of Q2 2024.
The gains have been considerable, with WTI adding about $7 per barrel over the month of February.
Yet a lot of analysts remain bearish about the commodity’s prospects. In fact, they believe that there is enough oil supply globally to keep Brent around $81 this year and WTI at some $76.50, according to a Reuters poll.
Yet, like last year in U.S. shale showed, there is always the possibility of a major surprise.
According to the respondents in that poll, what’s keeping prices tame is, first, the fact that the Red Sea crisis has not yet affected oil shipments in the region, thanks to alternative routes.
The second reason cited by the analysts is OPEC+ spare capacity, which has increased, thanks to the cuts.
“Spare capacity has reached a multi-year high, which will keep overall market sentiment under pressure over the coming months”, senior analyst, Florian Grunberger, told Reuters.
The perception of ample spare capacity is definitely one factor keeping traders and analysts bearish as they assume this capacity would be put into operation as soon as the market needs it. This may well be an incorrect assumption.
Saudi Arabia and OPEC have given multiple signs that they would only release more production if prices are to their liking, and if cuts are getting extended, then current prices are not to OPEC’s liking yet.
There is more, too. The Saudis, which are cutting the most and have the greatest spare capacity at around 3 million barrels daily right now, are acutely aware that the moment they release additional supply, prices will plunge.
Therefore, the chance of Saudi cuts being reversed anytime soon is pretty slim.
Then there is the U.S. oil production factor. Last year, analysts expected modest output additions from the shale patch because the rig count remained consistently lower than what it was during the strongest shale boom years.
That assumption proved wrong as drillers made substantial gains in well productivity that pushed total production to yet another record.
Perhaps a bit oddly, analysts are once again making a bold assumption for this year: that the productivity gains will continue at the same rate this year as well.
The Energy Information Administration disagrees. In its latest Short-Term Energy Outlook, the authority estimated that U.S. oil output had reached a record high of 13.3 million barrels daily that in January fell to 12.6 million bpd due to harsh winter weather.
For the rest of the year, however, the EIA has forecast a production level remaining around the December record, which will only be broken in February 2025.
Oil demand, meanwhile, will be growing. Wood Mackenzie recently predicted 2024 demand growth at 1.9 million barrels daily.
OPEC sees this year’s demand growth at 2.25 million barrels daily. The IEA is, as usual, the most modest in its expectations, seeing 2024 demand for oil grow by 1.2 million bpd.
With OPEC+ keeping a lid on production and U.S. production remaining largely flat on 2023, if the EIA is correct, a tightening of the supply situation is only a matter of time. Indeed, some are predicting that already.
Natural resource-focused investors Goehring and Rozencwajg recently released their latest market outlook, in which they warned that the oil market may already be in a structural deficit, to manifest later this year.
They also noted a change in the methodology that the EIA uses to estimate oil production, which may well have led to a serious overestimation of production growth.
The discrepancy between actual and reported production, Goehring and Rozencwajg said, could be so significant that the EIA may be estimating growth where there’s a production decline.
So, on the one hand, some pretty important assumptions are being made about demand, namely, that it will grow more slowly this year than it did last year.
This assumption is based on another one, by the way, and this is the assumption that EV sales will rise as strongly as they did last year, when they failed to make a dent in oil demand growth, and kill some oil demand.
On the other hand, there is the assumption that U.S. drillers will keep drilling like they did last year. What would motivate such a development is unclear, besides the expectation that Europe will take in even more U.S. crude this year than it already is.
This is a much safer assumption than the one about demand, by the way. And yet, there are indications from the U.S. oil industry that there will be no pumping at will this year. There will be more production discipline.
Predicting oil prices accurately, even over the shortest of periods, is as safe as flipping a coin. With the number of variables at play at any moment, accurate predictions are usually little more than a fluke, especially when perceptions play such an outsized role in price movements.
One thing is for sure, though. There may be surprises this year in oil.
lrina Slav
Slav writes for Oilprice.com.