Brent Closes Above $75 as Demand Optimism Grows

Global oil price benchmark Brent topped $75 on Wednesday, signaling that the futures market is still pricing in a solid demand rebound over the summer. In London, the August Brent contract closed up 38¢ at $75.19 per barrel after briefly breaking through to $76/bbl during the session. In New York, the front-month Nymex West Texas Intermediate (WTI) August contract gained 2¢ and closed at $73.08/bbl. The growing number of Covid-19 vaccinations around the globe is enabling more economies to return to relative normal, which is expected to boost oil consumption over the summer, especially in OECD countries. Brent futures spreads have widened to about 80¢ for the front two months, suggesting more supply tightness heading into September. Further out the forward price curve, Brent for August 2022 delivery is now trading nearly $7 above the August 2021 contract. “Growth in oil supply will be a fraction of expected demand growth in 2021," said PVM analyst Stephen Brennock. "Opec-plus is limiting supply while non-Opec volumes are more or less flat for this year as producers put profits ahead of output" (IOD Jun.22'21). The physical market is catching up with oil futures, and sellers are trying to prod this newfound bullishness by slowly pushing up their crude differentials. In the North Sea, spot prices of gasoline-rich Ekofisk and Oseberg -- two of the five grades that make up the dated Brent or BFOET (Brent, Forties, Oseberg, Ekofisk and Troll) pricing basket -- have surged to steeper premiums, reflecting an uptick in gasoline demand and the resulting improvement in gasoline crack spreads. July barrels of Russia’s Urals blend loading from the Baltic are also trading at narrower discounts to dated Brent, from negative $1.65 to about negative $1.50. Russia’s East Siberia-Pacific Ocean (Espo) blend for late July-early August loading changed hands at plus $3.50 to the Dubai benchmark, its highest premium in almost a year. Faster Stockdraws Adding to the bullish sentiment, oil inventories continue to draw at a healthy pace, showing that both the crude and refined product markets have continued to heal from the pandemic. At 9 billion barrels, global oil inventories -- including commercial tanks, oil at sea and strategic reserves -- are the lowest they have been in a year. Data from the US Energy Information Administration (EIA) showed that US crude inventories shed another 7.6 million bbl in the week ended Jun. 18 to 459.1 million bbl. Stocks in the storage hub of Cushing, Oklahoma alone drew by 1.8 million bbl as a steeper backwardation premium is teasing prompt oil out of storage (IOD Jun.21'21). For the past five weeks, US crude stocks -- including the Strategic Petroleum Reserve -- have drawn at a pace of more than 1 million b/d, the fastest rate since the peak of the pandemic last year. However, higher spot prices do not help boost crude exports, making US oil less competitive against other markets. “At current arbitrage and grade levels, the US can't export much, so oil will stay domestically and pressure timing,” said Ilia Bouchouev, managing partner at Pentathlon Investments. US gasoline stocks decreased by 2.9 million bbl to 240 million bbl, finally reverting the inventory uptrend of the last three weeks. Implied gasoline demand remained fairly steady at 9.4 million b/d, up 80,000 b/d from the previous week. US Distillates stocks, however, rose by 1.8 million bbl to 137.9 million bbl in the past week. More bullish bets in gasoil futures suggest that diesel may soon follow the recovery of lighter refining fractions such as gasoline and naphtha. In Europe, a crucial market for diesel, the benchmark ICE gasoil contract remains in contango, with prompt diesel at a discount to later deliveries, signaling ample supply. Julien Mathonniere, London