Save for later Print Download Share LinkedIn Twitter Financial speculators, smelling another rally in crude prices, are pouring capital into futures contracts, making spot oil more expensive in an already tight market -- and blowing out the prompt premium over later deliveries. Current crude prices signal expectations that consumers becoming increasingly mobile and active with the Covid-19 pandemic under control in more areas will tighten refined product inventories and spike product prices. Risk capital is betting that this will turn negative refinery margins around and motivate refiners to buy more crude oil, which should push benchmark Brent crude well beyond the $75 per barrel that is currently in the crosshairs (related). So far, product prices have risen in the US and are lagging in Europe and Asia, but data and prompt premiums over later supply in price curves -- known as backwardation -- show that key storage tanks are draining in the latter two regions as well, for both crude and refined products. “The spreads are getting wider every day. Backwardation begets backwardation,” a US crude broker said, adding that the inflow of capital shows that little can derail prices from running over $80/bbl. Slimmer Cushing Cushion The impact of backwardation is visible in Cushing, Oklahoma, the pricing and delivery point for the US benchmark Nymex West Texas Intermediate (WTI) futures contract. With inventories dropping below 44 million barrels -- 2 million bbl down on the week -- the premium of spot oil over delivery in six months has widened to $3/bbl (OD Jun.16'21). Profitable US refiners have been ramping runs by 1 million barrels per day over the past month to 16.3 million b/d, tightening the domestic market and draining commercial tanks by 18 million bbl in that period. Pricing firm GX points out that Cushing tanks now offer to store crude for as low as 12¢/bbl/month versus the 60¢ charged earlier during the pandemic. But producers now prefer to sell their crude with WTI ticking to a two-year high of more than $73/bbl, and exports have been creeping up to pre-pandemic levels of 3.2 million b/d over the past month, with the bulk of that going to Europe and Asia. Around the Corner European and Asian refiners are struggling to make money, but forward curves for consumer products signal that tightness is around the corner in those regions as well. Gasoline, naphtha and fuel oil are mostly in short supply around the globe, with premiums paid for prompt deliveries. Risk capital is betting on ICE Gasoil contracts that diesel is next. Jet fuel and liquefied petroleum gasses are the laggards. Overall, product prices are not high enough to push refiners into profitability. The Energy Intelligence refinery model, which charges variable costs to assess the profitability of incremental runs, show that European refiners lose $5 on running more Brent, and Asian refiners lose $1.35/bbl on running more Oman. But crude flows are picking up to Asia, in part thanks to stellar petrochemical margins, and two out of three of its imported barrels come from the Mideast, where supply is restricted due to Opec-plus production cuts. Three-month backwardation in Dubai is assessed at $2/bbl with spot Dubai at $71.75. Benchmark Brent is running ahead with risk capital adding to positions (OD Jun.14'21). Front-month August Brent is nearly $3.70 more expensive than loadings in six months -- a rapid widening in recent weeks. The key ICE Gasoil contract remains in contango, with prompt diesel at a discount to later supplies, signaling wide availability. Iran Helps Rally Traders noted that any nuclear deal that Iran would sign after negotiations with the US would not result in a sharp rise in exports after a more conservative government in Tehran was voted into power (IOD Jun.21'21). In fact, the fate of the nuclear negotiations now hangs in the balance, PVM brokers noted. High-case forecasts had seen 1 million b/d of additional Iranian crude come to market starting in August. That might be less likely now, but even if exports rise, the thinking is that high compliance by Opec-plus to its production cuts will keep a lid on excess supply. The ongoing oil price rally could come under pressure if the Delta variant of Covid-19 continues to spread, but for now, positive sentiment is fed by assumptions that the pandemic can be controlled. If prices go over $80/bbl, Saudi Arabia might open the taps to cool the rally, the US broker said, to avoid higher prices causing demand destruction or triggering more investments in oil production capacity. John van Schaik, New York
