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Market Held Hostage by 'Super Backwardation'

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Russia’s invasion of Ukraine has pushed gaping oil price spreads to record highs, presenting new challenges to market rebalancing. The Brent prompt premium over deliveries in six months is over $18 per barrel, a level deemed unsustainable and potentially self-destructive. In normal times, it would pull up the flat price of oil to whatever level is needed to either increase supply or smother demand. But so far, "super backwardation" has only made it harder to trade crude in a world in dire need of supply. Current prices are choking off inter-region arbitrage for long-haul destinations to Europe: West Africa, US, Brazil, Mexico. Europe’s Brent oil traded more than $6 over similar-quality US West Texas Intermediate crude, double what traders think the "natural" premium should be. Any surplus US crude could hence be exported to Europe and Asia. But refiners find themselves in a conundrum. The steep backwardation makes it expensive for them to buy and hedge, as crude loses value when it sails for several weeks to the refinery. Meanwhile, super backwardation also dissuades refiners from holding stockpiles since sale values are now higher than in the future. The US and 30 other countries have agreed to release 60 million barrels from strategic reserves to help ease the market, but the steep backwardation and explosive shipping rates are likely to prevent those barrels from reaching Europe, where they are most needed. Instead, China could scoop them up, traders reckon.

Topics:
Oil Prices, Oil Futures and Derivatives, Crude Oil, Ukraine Crisis
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