© Reuters. FILE PHOTO: Equinor’s Johan Sverdrup oilfield platforms and accommodation jack-up rig Haven are pictured in the North Sea, Norway December 3, 2019. REUTERS/Ints Kalnins
(Reuters) – Cash prices for key grades produced in the Middle East, Europe and the United States have slumped in recent weeks from record premiums to futures benchmarks, as refiners balk at higher operating costs rise and major economies get set to release a flood of oil from strategic reserves.
Crude benchmarks traded in spot markets around the world are often predictive of the direction of global futures prices. Right now, declining premiums for grades from Dubai, the North Sea and west Texas all suggest that the decision from big consumers to release crude reserves is having a dampening effect on prices, offsetting some of the anticipated loss of Russian exports.
In recent days, the premiums for Middle East benchmarks Dubai, Oman and Murban crude have fallen to a third of their early March peak. North Sea’s Brent and Forties are down 80% to 90% from when the United States banned Russian oil imports after the Feb. 24 invasion of Ukraine. U.S. grades like Mars sour are weakening as the U.S. reserve releases more medium heavy sour crude into the market. [CRU/M] [CRU/E]
For a related graphic on Middle East crude benchmark prices, click https://tmsnrt.rs/3JmSQAt
The International Energy Agency has warned that the world may lose 3 million barrels per day of Russian crude and oil products starting in April. Russia exports between 4 and 5 million bpd, making it the second-largest crude exporter behind Saudi Arabia. [IEA/M]
To cover that loss, the United States announced its largest-ever release from the Strategic Petroleum Reserve (SPR) at 1 million barrels per day for six months from May, or about 180 million barrels, the third such release in six months. Other IEA members agreed on Friday to release oil following a March 1 release.
For a related graphic on North Sea, West African crude, click https://tmsnrt.rs/35IO1Tu
WEAK DEMAND FOR NORTH SEA, AFRICAN OIL
Since Russia’s invasion, which it terms a “special operation,” world futures markets became increasingly backwardated – where current prices trade at much higher levels than later-dated futures contracts, a sign of tight near-term supply.
But of late, buyers have balked at paying those record prices, instead drawing down inventories. That has led to an overhang in the West African oil markets, traders said.
“Refineries are cautious and shopping around to the last minute; SPR certainly makes the market a bit less strained over the next six months and, of course, there are worries of demand destruction,” a senior European trader said.
Oil for April loading from Africa’s No. 2 oil exporter Angola has yet to sell out along with at least 10 cargoes for May, the slowest sales in years, traders said, due to poor demand from top buyer China. The Chinese government recently extended a lockdown in Shanghai to cover that city’s entire population of 26 million people due to coronavirus infections.
Supplies from top exporter Nigeria were also piling up, with an overhang of April and May-loading crude reaching at least 40 cargoes, they said.
For a related graphic on price spreads, click https://tmsnrt.rs/3r4XtrQ
“With Asian buyers largely filling their requirements and European refiners not stepping up yet, (the overhang) means it’s just a matter of time before offers come down,” said one trader of West African oil.
India has turned to cheap Russian Urals crude, reducing its demand for supplies from the Middle East and Africa, they said.
For a related graphic on U.S. spot crude premiums, click https://tmsnrt.rs/3rpz00D
THE MEDIUM SOUR PICKLE
In the United States, the SPR release is expected to pump more medium sour crude into the market, weighing on spot Mars crude, traders said. Mars Sour is trading at a $2.40-per-barrel discount to the U.S. benchmark, from a $1.25-per-barrel premium hit in late February.
The spread between U.S. West Texas Intermediate (WTI) and Brent crude, along with rising freight costs, are making U.S. exports less attractive, traders said.
Easing crude prices could encourage refiners to increase output to meet peak summer demand at a time when global diesel inventories are at their lowest levels in more than a decade.
For a related graphic on Global oil refining margins, click https://tmsnrt.rs/3DDCSQi