As Hedge Funds Bet Against Oil, Traders See Another Story
(Bloomberg) -- Hedge funds are still holding large bearish bets against oil and OPEC, yet out in the real world traders and refiners buying and selling actual barrels say it’s starting to look somewhat more bullish.
"The market is looking a bit better," Ian Taylor, chief executive officer of Vitol Group, the world’s largest oil trader, said in an interview. "Physical differentials are improving across the world.”
Differentials are an important indicator of the state of the market. They reflect the price of each type of crude compared with a benchmark, often Brent or West Texas Intermediate. The narrower the discount -- or larger the premium -- the stronger the market for that particular grade.
While financial investors largely look at just those two big crude contracts, physical traders have a broader view because they regularly deal in dozens of varieties from Venezuela’s Tia Juana Light to Vietnam’s Bunga Kekwa.
Price differentials for some important varieties of crude, including Russia’s top export Urals, are at the strongest levels in three years, according to data compiled by Bloomberg. That would be encouraging for Saudi Arabia and its allies, if the hedge funds were paying attention.
"The improvement in physical markets is being ignored in the financial space," said Amrita Sen, chief oil analyst at Energy Aspects Ltd., a London-based consultant. "In other words, even though physical differentials are strengthening, headline price is range-bound at best.”
The emerging tightness in the physical market helped Brent to move briefly above $50 a barrel last week, but prices were back around $49 on Tuesday. Even as Saudi Arabia promised deep cuts in shipments at a meeting of producers in St. Petersburg, Russia, on Monday, signs of growing production from Libya and Nigeria -- exempt from the output curbs -- kept a lid on prices.
Seasonal Factors
The improvement in physical differentials is partly seasonal: refiners process more oil during the northern hemisphere summer as holidaymakers hit the road, consuming more gasoline and diesel.
Global refineries’ oil intake will peak at 81.4 million barrels a day in August, up from 80.1 million barrels a day in May, before the start of the driving season, according to the International Energy Agency. American refiners are gulping down a record 17.5 million barrels, well above the 2016 and 2015 summer averages, according to government data.
However, the tightening also reflects more enduring factors: after a weak start of the year, global oil demand growth is strengthening. The IEA forecasts annual consumption to climb 1.6 million barrels a day in the third quarter from a year earlier, compared with just 1 million barrels a day in the first. And the OPEC output cuts, even if faltering, are slowly biting in some corners of the market.
"Demand is strong, firmly on track to grow 1.5 million barrels a day this year, underpinning strong refining margins," said Martijn Rats, oil analyst at Morgan Stanley in London.
The improvement in the physical market is more marked for lower-quality heavy, sour crude -- which has a higher-sulfur content -- than for light, sweet oil. The Organization of Petroleum Exporting Countries pumps mostly sour crude, so its production cuts have hit that corner of the market disproportionately. The strength of those prices has nonetheless supported sweeter grades.
Urals Differential
In Europe, Urals crude was 65 cents a barrel cheaper than Brent this month, the narrowest discount in almost three years, according to data compiled by Bloomberg. In April, the discount was about $2.
In the Americas, Colombian crude Vasconia is quoted at $3 a barrel under WTI, the narrowest discount in four years, and half the $6 differential in January. Oriente crude, pumped by OPEC member Ecuador, is trading at a discount of $5 a barrel to WTI, the narrowest since 2013.
12
View Full Article
WHAT DO YOU THINK?
Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
- ExxonMobil Racks Up Discoveries in Guyana Block Eyed by Chevron
- Oil Market Sentiment Has Improved Significantly
- EU, US Eye Collaboration on Nuclear Materials
- USA Driving Activity to Increase to All-Time Highs
- EU Electricity Export to Ukraine Up 94 Percent in Two Years
- China Coal Output Falls for First Time since Government Ordered More
- TC Energy to Sell Prince Rupert Gas Pipeline Project to First Nation
- BP Pulse Buys One of Europe's Largest Truck Stops
- UK CCUS Plans Outdated: Think Tank
- I Squared Eyes Full Ownership of Europe Gas Storage Firm
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Major Oilfield Discovery
- EIA Drops 2024 Henry Hub Gas Price Forecast
- EIA and Standard Chartered Offer Up Latest Oil Price Predictions
- Red Sea Region Sees Another Watershed Incident
- Chevron Oil Project in Kazakhstan to Cost $48.5B
- OPEC Voices Encouragement after IEA Affirms Support for Oil Security
- Biden Govt Bares Strategy for Freight Charging, Hydrogen Fueling Infra
- Ukraine Hits Third Russian Refinery In Escalating Drone Strikes
- Rystad Looks at the Buzz Around White Hydrogen
- VIDEO: Missile Attack Kills Crew Transiting Gulf of Aden
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Major Oilfield Discovery
- What Is the Biggest Risk to Offshore Oil and Gas Personnel in 2024?
- Is Peak Oil Demand Close?
- Vessel Sinks in Red Sea After Missile Strike
- JP Morgan, Standard Chartered Reveal Latest Oil Price Forecasts
- Exxon Rights in Stabroek Do Not Apply to Hess Merger with Chevron: Hess
- Rystad Forecasts Net Production of Top Permian Producers in 2024
- Analysts Reveal Latest Oil Price Outlook Following OPEC+ Cut Extension