The end of some of the weakest physical crude prices in years could be in sight.
While oil futures prices are at their highest since 2014 amid geopolitical risks — including the possibility of renewed U.S. sanctions on Iran — physical prices in some corners of the oil market have been depressed. Russian Urals and Caspian CPC crudes have recently traded at multi-year lows, and West African crude flows to Asia have slumped to the lowest since 2015.
The weakness is on the brink of reversing as refiners ramp up purchases as they complete yearly maintenance that had cut their processing rates, according to at least five traders directly involved in the market.
“The mismatch will correct through physical markets coming up rather than futures coming down,” said Richard Mallinson, a geopolitical analyst at Energy Aspects Ltd. in London. “Global balances look constructive in the second half of the year, after refinery maintenance is over.”
In the meantime, European refiners may be set for a summer windfall with a host of cheap grades to cherry pick from as they ramp up throughput. A flood of U.S. crude exports, lackluster demand for imports in China, a surfeit of Russian shipments and the lingering effects of refinery maintenance season across the globe have combined to curb prices for some grades in the world where barrels of oil are actually bought and sold — even amid a rising trend in futures contracts.
“Brent that is trading now is two months ahead, so it is pricing in July when refiners are back from maintenance,” Mallinson said. The current weakness in the market for Russian grades is a reflection of U.S. crude imports coming “at the wrong time, when refinery maintenance was at its peak.”
Russian Urals crude sunk to its lowest price in more than seven years on May 1, trading at a discount of $3.95/bbl to its benchmark. Caspian CPC on May 2 sank to $2.90/bbl less than the benchmark, the largest discount since June 2012. Loadings of CPC are scheduled to be 1.32 MMbpd this month, near the highest on record.
Offline refinery capacity in Russia is set to drop to 556,000 bpd this month, down from 763,000 in April, which was the highest for the year, according to data from the Russian Energy Ministry. In Europe, planned refinery outages are set to drop to 54,000 bpd in July, from 1.16 million this month, Energy Aspects said in a late-April report.
U.S. crude exports climbed to 2.331 MMbpd — the highest on record — in the week ending April 20 and remained high the following week, data from the U.S. Department of Energy show. As the U.S. pumps more oil than ever before, WTI’s discount to global benchmark Brent has deepened, spurring shipments to Europe this month, according to traders.
The West African crude market has been hit by a drop in Chinese buying, with the nation set to import the lowest amount of Angolan crude in at least seven years. Chinese refineries have reduced purchases this year with a change to a tax rule particularly constraining buying by independent refineries in the world’s largest importer of oil.
“The Chinese are not really strong buyers and probably won’t be for a month or two,” said Torbjorn Kjus, chief oil analyst at DNB Bank ASA in Oslo. “You should see a large upward crude demand moving into July and August on a global scale.”
Futures markets are awaiting U.S. President Donald Trump’s decision later Tuesday on whether he’ll pull out of a 2015 deal between Iran and world powers that eased sanctions on the producer in return for curbs on its nuclear program. It’s the latest geopolitical factor to support futures prices, following U.S-led military strikes on Syria in April and region tensions between Saudi Arabia and Iran-backed rebels in Yemen.
The lack of a sell-off following the air strikes in Syria “shows there is very little appetite for people to go short, and the position is justified by uncertainty over Iran,” Energy Aspects’ Mallinson said.