Crude Market Shows Strength Beyond Seasonal Peak

The market for physical barrels of crude from places as far apart as Oman and Colombia is strengthening beyond the traditional seasonal peak in demand, a positive indicator for global benchmark futures prices that remain stuck near $50.

Physical differentials—the price gap between individual grades of crude and widely traded markers like Brent or West Texas Intermediate—have strengthened over the last two weeks, data compiled by Bloomberg said.

That is happening even for barrels to be shipped in late September and October, typically a period of weaker demand due to seasonal refinery maintenance.

The relative prices of crudes such as Nigeria’s Forcados or Norway’s Ekofisk are rarely a topic of discussion outside the oil industry, but they are an important indicator.

While hedge funds or other speculators tend to use futures or options contracts to make bets on the direction of prices in the coming months or years, physical differentials say more about the state of the global market right now. Narrowing discounts, or growing premiums, for particular grades of crude are a positive sign.

The US physical, or cash, market has been particularly strong due to high local consumption in the refining corridor of the Gulf of Mexico and purchases of crude destined for export.

Middle Eastern crude is also strong, as OPEC continues to cut output and Asian refiners enjoy good profit margins. Oman crude is quoted at 10 cents a barrel premium to the Dubai swaps benchmark, compared with a discount as wide as 60 cents last month.

The North Sea oil market is being supported by traders booking shipments to rare destinations, including cargoes of Ekofisk crude to Chile, Brent to Uruguay and Forties to Thailand.

Markets may be strong right now, but there are reasons to doubt it will persist.

Refineries in the US, the world’s largest consumer, processed a near record of 17.6 million barrels a day last week. If the usual seasonal patterns hold, their demand will drop to about 16.5 million by early September.

Oil traders are also worried that supply and demand fundamentals for early 2018 are looking weak.

Oil fundamentals are "strong now, but bearish seasonality for crude and products is just around the corner", said Mike Wittner, the head of oil market research at Societe Generale SA.