Oil markets are returning to relative normality, the once yawning gap between the price of an actual physical barrel of oil and futures prices has narrowed sharply.
At its worst in April, a barrel of oil in the North Sea cost $10 less than the price on a Brent oil futures contract, a decade-high gap for the world’s benchmark oil price, according to S&P Global Platts. Now, the gap has shrunk to less than $2 a barrel as the oil market rebalances and traders are no longer in panic mode to find buyers for unwanted crude.
“A few weeks ago, we had armageddon pricing when nobody wanted physical barrels apart from for storage,” said Richard Fullarton, chief investment officer at hedge fund Matilda Capital Management Ltd.
The price of physical oil slipped far below futures prices last month when oil storage ran short and the cost to store crude jumped. The two prices tend to collide ahead of the expiration of futures contracts.
The return to health in the physical oil markets reflects several factors. Oil producers have made large, coordinated cuts in production. China’s economy has restarted and lockdowns in Europe and the U.S. eased, creating an uptick in demand. And a shortage of oil storage, which at one point drove U.S. oil futures prices into negative territory, appears to have peaked.
Oil prices, both physical and futures, have almost doubled since their April nadir, though they slipped Friday after China abandoned its yearly gross domestic product growth target.
Front-month futures for Brent crude, the global benchmark, fell 2.6% to $35.13 a barrel Friday, having rebounded from their $19.33-a-barrel low on April 21. Its physical counterpart was priced at $34.13 a barrel late Thursday.
Physical oil tends to be traded by major commodities trading houses, oil companies and refiners who have the financial heft and logistical capacity to store large amounts of oil in case they need to wait for a better pricing environment.
One of the largest independent traders, Trafigura Group Pte., has been on a buying spree. The Swiss company snapped up at least 15 cargoes of North Sea crude—amounting to 9 million barrels of oil—between May 13 and 21, according to S&P Global Platts. Trafigura declined to comment on its bet on North Sea crude, which was reported by Reuters.
Smaller traders also buy physical barrels of oil or refined products, for instance by filling fleets of tanker trucks with gasoline, selling it on to gas stations when prices move higher.
Overall, the gap between physical oil and futures was more pronounced in international markets than the U.S. As a largely seaborne crude, Brent producers could rush to store oil on massive tanker ships. Sellers of the largely landlocked U.S. benchmark, West Texas Intermediate, had to pay buyers to take it off their hands when futures prices turned negative on April 20.
Unlike Brent oil futures, which are all cash settled, some WTI futures contracts require their owners to take delivery of physical oil when the contracts settle. Even so, physical WTI at the end of March was $6 less a barrel than the futures market.
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That gap is now close to gone. The storage conditions were feared to be most acute in Cushing, Okla., where WTI contracts are settled.
“We didn’t see tank tops at Cushing. Instead we’ve seen phenomenal levels of shut-ins,” said Edward Marshall, a commodities trader at Global Risk Management, referring to the act of oil producers turning off wells to choke supply.
A pickup in refiner demand to supply Americans getting back on the road has helped WTI’s recovery. Pipeline flows from Cushing to Midwestern refiners are 400,000 barrels a day higher than they were in early April, according to commodity-market information provider Genscape.
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