NEW YORK, Nov 28 (Reuters) – Global oil markets are signaling a possible turnaround, as traders and analysts worry about falling crude oil demand and an oversupplied market in the coming months.
After months of strength, crude futures are flirting with year-long lows as top oil consumer China enters further COVID-19 lockdowns while central banks raise interest rates to fight inflation.
Global oil prices for the first month of last week traded weaker than futures contracts, while prices for physical crude grades around the world fell, market participants said.
“The divergences are confirming what the apparent prices are indicating – there is a demand deficit and/or a supply surplus,” said Tamas Varga of oil broker PVM.
The tumultuous environment comes at a promising time for markets. On December 5, European Union sanctions on Russian crude imports are set to begin, along with plans by G7 nations to force shippers to comply with a price cap on Russian oil sales.
Meanwhile, OPEC+ – a group of allied producers including the Organization of the Petroleum Exporting Countries (OPEC) and Russia – is scheduled to meet on December 4 to discuss production levels.
The changes are evident in the structure of the market – a comparison of near-term versus long-dated contracts. Over the past week, crude futures contracts have flipped in and out of contango, where the spot price of the commodity is lower than the futures price, indicating short-term weakness.
The front-month U.S. crude futures contract traded as low as 38 cents against the second-month contract, the weakest difference since November 2020, Refinitiv Eikon data showed. The front-month contract for international benchmark Brent traded 6 cents lower than the second-month, the weakest since August.
The inter-month spread of December and January Dubai swaps flipped into contango last week for the first time in a year and a half.
Weaker demand from Asia
In China, traders are worried about oversupply if China and India continue to import Russian oil at huge discounts. At the same time, additional COVID restrictions are expected to weigh on demand.
Angolan and other West African crude oil offers to China, a key customer, are a barometer of the country’s physical crude demand. China’s Unipec, a major global oil trader, offered for sale several cargoes of crude for December loading, in a rare sign of waning interest.
Meanwhile, Norway’s Equinor this week offered a cargo of Angolan pazflour crude oil at a discount of $2.50 a barrel to date Brent, down less than a dollar on the week. The spot price for crude oil out of Oman – a major supplier to China – fell to 82 cents above Dubai crude, which was as high as $15.06 a barrel in early March.
Oil storage is being built in many areas, said Norbert Rucker, head of economics and Next Generation Research at Swiss asset manager Julius Baer.
In addition, European refiners have found themselves oversupplied with crude oil as expected shortages due to EU sanctions on Russian oil have not materialized. Read more
The premium for North Sea crude forties-to-date Brent hit an all-time high of $5.40 in July, but has narrowed sharply this week to just 75 cents. Forty typically sets the date Brent price.
In the United States, WTI Midland prices weakened to just a 20-cent premium to crude futures, down from a premium of more than $2 nearly a month ago. That’s despite inventories in Cushing, Oklahoma, a major U.S. warehousing center, at a two-month low.
Reporting by Stephanie Kelly in New York, Mayu Xu in Singapore, Noah Browning and Alex Lawler in London and Arathi Somasekhar in Houston; Edited by Kenneth Maxwell
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