Europe and Africa Oil Markets Tighten, Bolstering Support
On February 23, according to traders, LSEG data, and analysts, shipping delays in the Red Sea and OPEC+ supply cuts are causing tightening in physical oil markets in Europe and Africa. This is also affecting the Brent crude market structure, providing additional support to oil futures prices.
The physical oil markets in Europe and Africa, along with the Brent crude futures market, are experiencing increased tightness. The Brent crude futures market structure, specifically, reached its most bullish since October, with the premium of the first-month contract to the six-month contract reaching $4.34 a barrel on Thursday. This market structure, known as backwardation, suggests a perception of tight prompt supply.
Analyst James Davis from FGE noted a potential increase in tanker diversions contributing to a tighter crude balance. Despite refinery maintenance, high crude demand persists due to robust refining margins. The Red Sea has seen more tankers avoiding routes since mid-November due to drone and missile attacks by Yemen’s Houthis, leading to a tighter shipping situation.
Refining margins for diesel and gasoline in Europe rose to multi-month highs of $34.3 and $11.6 a barrel, respectively, in January, according to Reuters calculations. The unexpected strength in both Brent and U.S. crude in backwardation has surprised the trading community, countering earlier predictions of supply outpacing demand at the beginning of the year.
This stronger market scenario benefits the Organization of the Petroleum Exporting Countries (OPEC) and its allies (OPEC+), which have been implementing supply cuts for the past two years. OPEC+ leaders view backwardation as a positive market trend because it discourages traders from holding inventory for later resale at a premium. Additionally, low stocks contribute to a bullish market sentiment.
As of Thursday, Brent traded at almost $84 a barrel, marking a 9% increase since the beginning of the year. The tightening market conditions and rising oil prices could have broader economic implications, impacting energy, transportation, and manufacturing costs. This trend may also pose a challenge to recent efforts to combat global inflation, especially as major central banks consider interest rate cuts.
