The Big Oil Turnaround

The Big Oil Turnaround
From negative prices to a bull market.

(Bloomberg) -- Every day, traders in London congregate at 4 p.m. to buy and sell North Sea oil for half an hour. The window, as it’s known in the industry, is where competition between the most powerful players in the market sets the price of Brent crude.

Two months ago, every trader wanted to sell cargoes and none were keen to buy. Now the window has transformed into a bull market, where bids outnumber offers 10 to one and prices are surging.

“The physical market is strong,” said Ben Luckock, co-head of oil trading at Trafigura Group.

The turnaround reflects the most torrid period in the history of oil.

First, the coronavirus outbreak obliterated demand in China and shattered the oil alliance between Moscow and Riyadh. Next, the global epidemic and destructive Saudi-Russia price war pushed the market to the brink of disaster. The collapse brought the rivals back together for the biggest production cut on record, just as the pandemic ebbed.

Mirror Image

The renewed strength of the “physical market” for crude -- where actual barrels change hands between producers, refiners and traders -- is driving a surge in the much larger Wall Street world of oil contracts traded on exchanges in London and New York.

West Texas Intermediate futures rose above $40 a barrel on Friday. That’s a mirror image of two months earlier, when the U.S. benchmark made an unprecedented plunge into negative pricing as storage tanks came close to filling.

Beyond the symbolism of that number for the American market, the oil price curve for Brent -- the range of futures contracts covering the coming months -- shows the international market has transformed too.

It flipped last week into so-called backwardation, with crude for immediate delivery trading at a premium to forward contracts. That shape is a telling sign that refiners that saw demand for their products disappear during the lockdown, are now willing to pay top dollar to secure supplies for their facilities.

Leaving Lockdown

“You can see demand ramping up every week,” said Marco Dunand, co-founder of major oil trading house Mercuria Energy Group Ltd.

In China, oil consumption is now back to pre-pandemic levels, according to official data. It’s still down in countries like Italy and Spain, which were badly affected by the coronavirus, but rapidly recovering in others, including India, Japan, France and Germany.

Global demand fell as much as 30% in late March and early April, when governments locked down entire countries. The scale of the rebound is still hotly debated, but most say consumption is now 10% to 15% below normal levels.

“Our short-term tracking of demand confirms a healthy recovery from the lows of April,” said Giovanni Serio, chief economist at Vitol Group, the world’s largest independent oil trader.

Vitol estimates that oil demand is rising by about 1.4 million barrels a day every week in June -- that’s roughly equal to adding the whole consumption of the U.K. to the market, weekly.


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