Oil prices have risen on the back of U.S. sanctions on Iran, but a short-term glut in the physical market is softening the blow — for now. The market, however, is starting to price a more dire situation by year-end.
Oil refiners have plenty of crude at hand right now, with unsold cargoes in north-west Europe, the Mediterranean, China, and West Africa, according to physical traders who asked not to be named discussing market movements.
The overhang is reflected in Brent nearby time-spreads, which are fast narrowing — a sure sign of an oversupplied market. The July-August price spread for example has fallen from a peak of 63 cents per barrel in mid-April to a five-month low of 24 cents now despite U.S. President Donald Trump withdrawing from the Iran nuclear deal and announcing a raft of new sanctions that threaten to cut crude supplies.
Deferred oil spreads are widening, however. The November-December Brent spread rose too 56 cents per barrel on Wednesday, its strongest ever, suggesting that traders are starting to price tightness despite the current excess.
"Our trading backgrounds tell us that the wrong approach is “spreadsheet” analysis and barrel counting," said Thibaut Remoundos, founder of London-based Commodities Trading Corporation Ltd. "Oil can be an emotional market and the perception of barrels-at-risk is everything now."
One indicator of the overhang in the prompt market is Vitol Group, the world’s top independent oil trader, offering on Thursday a cargo of Angolan Kissanje crude for delivery to China as early as May 20. With the vessel currently near Singapore and well on its way to its final destination, this represents a sharp contrast to the more typical trade of cargoes bought even before they have loaded in West Africa.
Moreover, U.S. crude exports that at times have surged above 2 million barrels a day are reinforcing the oversupply. Add seasonal refinery maintenance and the combination has "barrels without a home, creating a prompt overhang," said Amrita Sen, chief oil analyst at Energy Aspects Ltd. in London.
For weeks, physical oil traders wondered whether the weakness in the physical oil market could bring down the paper — or derivatives — market. The U.S. sanctions on Iran have changed the picture, with the market pricing that physical prices will ultimately track the paper market higher.
"The prompt crude overhang needs to clear," said Sen. "But balances for the second half of 2018 remain bullish and no one really questioned that."