By Alex Lawler, Natalie Grover and Noah Browning
LONDON (Reuters) – Red Sea shipping delays and OPEC+ supply cuts are tightening physical oil markets in Europe and Africa and the market structure for Brent crude, giving further lift to oil futures prices, according to traders, LSEG data and analysts .
A sustained rise in crude oil prices would drive up energy, transportation and manufacturing costs and threaten to erase some of the recent decline in global inflation, just as major central banks are expected to begin cutting interest rates.
On Thursday, the structure of the benchmark Brent crude oil futures market reached its strongest rise since October. The premium of the first-month contract to the six-month contract reached $4.34 per barrel. This structure, known as backwardation, indicates the perception of a tight immediate supply.
“It looks like there has been an increase in (tanker) diversions, which is tightening the crude balance,” said FGE analyst James Davis. Crude oil demand is high due to high refining margins despite refinery maintenance, he added.
More and more tankers have been avoiding the Red Sea since the Houthis in Yemen began drone and missile attacks on ships in mid-November. They say they are acting in solidarity with the Palestinians as Israel wages war against Hamas.
Average refining margins for diesel and gasoline in Europe rose to multi-month highs of $34.3 and $11.6 a barrel, respectively, in January, Reuters calculations show.
US crude oil is also in backwardation, with strength in Brent and WTI surprising the trading community after forecasts that supply would exceed demand earlier in the year.
The stronger market is a bonus for the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+. The company has cut supply over the past two years but has often struggled to get prices above $80 a barrel – the minimum most producers need to balance their budgets.
Brent traded at nearly $84 a barrel on Thursday, up 9% this year.
The story goes on
OPEC+ leaders have said that backwardation is a positive market trend because it discourages traders from holding inventory to later resell at a premium, with low inventories also providing bullish market sentiment.
Global onshore crude oil inventories are at 4.4 billion barrels, the lowest level since early 2017, when intelligence agency Kpler began tracking the data, JPMorgan said in a report.
“The physical sweet crude market is very tight,” said Gary Ross, CEO of Black Gold Investors, using a term for low-sulfur crude. Outages in Libya, a cold snap in the U.S. that limited production and payment problems for some Russian shipments were among the reasons, he said.
“FIRMER STANDING”
OPEC+ sources said the group will decide in early March whether to extend oil production cuts until the second quarter of the year or begin resuming supply to the market.
“The market has found firmer footing with Brent trading above $80 for some time, supported by what appears to be a better-than-expected demand outlook and … tanker diversions keeping millions of barrels at sea longer,” he told Ole Hansen , Head of Commodities Strategy at Saxo Bank.
“I’m sure OPEC+ will be very happy.”
In the North Sea crude market, the spread between Forties crude and benchmark Brent crude has reached its highest level since late November, and prices of some other grades seen as local alternatives to Middle East crude are skyrocketing shot.
About 1.07 million bpd of Middle Eastern crude entered Europe in October, according to Kpler data, with volumes declining in subsequent months due to the Red Sea attacks and expected to average about 606,000 bpd in February.
“Delays in deliveries from eastern Suez… are making nearby crude more attractive,” a European crude trader said. “The offers for crude oil from West Africa and the North Sea reflect this.”
“Refining margins in Europe for Angolan crude are very favorable and Nigeria is selling cargoes faster than in months.”
Nigerian Forcados crude was offered at Brent crude plus $6.00 a barrel this week, the highest since October, LSEG data showed. The Nigerian varieties Qua Iboe and Bonny Light are priced at $3.80 and $3.00 respectively.
In Asia, Middle East crude oil spreads remained fairly stable month-on-month, suggesting that European and African crude oil are seeing most of the strength.
US crude oil was mixed. On the positive side, there was some tension due to a cold snap last month that hit Permian production, while shipments to Asia are expected to pick up in March after a weak January and February.
An unplanned outage at BP's Whiting refinery has caused heavy Canadian crude to spill into the Cushing storage hub, meaning there are currently few shortages.
(Reporting by Alex Lawler, Natalie Grover, Noah Browning and Ahmad Ghaddar, additional reporting by Florence Tan and Arathy Somasekhar; Editing by Dmitry Zhdannikov, Kirsten Donovan)
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