NEW YORK, Nov 28 (Reuters) – The global oil market is signaling a potential shift as traders and analysts worry about falling demand for crude and a surplus market in the coming months.
After months of strength, crude futures are flirting with all-year lows as major oil consumer China enters additional COVID-19-related lockdowns while central banks raise interest rates to fight inflation.
Global oil prices in the first month of last week traded lower than futures, while prices for physical grades of crude around the world fell, market participants said.
“The differentials confirm what the prices implied – there is a demand shortfall and/or an excess supply,” said Tamas Varga of oil broker PVM.
The murkier environment comes at a difficult time for the market. On December 5, a European Union ban on imports of Russian crude is set to begin, along with a plan by G7 countries to force shippers to comply with a price cap on Russian oil sales.
Meanwhile, OPEC+ – the grouping of the Organization of the Petroleum Exporting Countries (OPEC) and allied producers including Russia – is due to meet to review production levels on Dec. 4.
The changes are evident in the structure of the market – a comparison of short-term versus longer-term contracts. Over the past week, crude futures have swung in and out of contango, where the fast price of a commodity is below the future price, suggesting near-term weakness.
The first-month U.S. crude futures contract traded 38 cents lower than the second-month contract, the lowest differential since November 2020, according to data from Refinitiv Eikon. The first-month contract for the international benchmark Brent traded as low as 6 cents below the second month, the weakest since August.
The inter-month spread for December and January in the Dubai swap turned into contango last week for the first time in a year and a half.
LOW DEMAND FROM ASIA
In China, traders are worried about oversupply if China and India continue to import large quantities of Russian oil at a discount. At the same time, additional COVID restrictions are expected to weigh on demand.
Crude oil supplies from Angola and other West African countries to China, the main customer, are a barometer of the country’s physical demand for crude. China’s Unipec, one of the world’s top oil traders, has offered for sale several shipments of crude that were due to be loaded in December, a rare sign of slowing interest.
Meanwhile, Norway’s Equinor this week offered a shipment of Angolan Pazflor crude for a discount of $2.50 a barrel to dated Brent, down more than a dollar in a week. Spot prices for crude from Oman – a key supplier to China – fell to 82 cents against Dubai crude from $15.06 a barrel in early March.
Oil storage in several regions is building, said Norbert Rucker, head of next-generation economics and research at Swiss wealth manager Julius Baer.
In addition, European refiners have found themselves oversupplied with crude as an expected shortage due to the impending EU ban on Russian oil has yet to materialize. Read more
The North Sea Forties crude premium to dated Brent hit an all-time high of $5.40 in July but has narrowed sharply to just 75 cents this week. Quarantine generally defines the value of dated Brent.
In the United States, WTI Midland prices have weakened to a premium of just 20 cents to crude futures, from a premium of more than $2 about a month ago. That’s even though inventories in Cushing, Oklahoma, a key U.S. storage hub, are at two-month lows.
Reporting by Stephanie Kelly in New York, Muyu Xu in Singapore, Noah Browning and Alex Lawler in London and Arathy Somasekhar in Houston; Editing by Kenneth Maxwell
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