New Telegraph

Europe, Africa oil markets tighten, lending support to futures

Red Sea shipping delays and OPEC+ supply cuts are tightening physical oil markets in Europe and Africa as well as the Brent crude market structure, lending further support to oil futures prices, according to traders, LSEG data and analysts. A sustained rise in crude prices would lift energy, transportation and manufacturing costs and threaten to unwind some of the recent falls in global inflation, just as major central banks are expected to begin cutting interest rates.

On Thursday, the benchmark Brent crude futures market structure hit its most bullish since October. The premium of the firstmonth contract to the six-month contract reached $4.34 a barrel. This structure, called backwardation, indicates a perception of tight prompt supply. “It looks like there has been a pick-up in (tanker) diversions, which is making the crude balance tighter,” said FGE analyst James Davis. Crude demand is high because of strong refining margins, despite refinery maintenance, he added. More tankers are avoiding the Red Sea since Yemen’s Houthis began drone and missile attacks against shipping in mid-November, saying they are acting in solidarity with Palestinians as Israel wages war on Hamas. January average refining margins for diesel and gasoline in Europe rose to multi-month highs of $34.3 and $11.6 a barrel, respectively, Reuters calculations show. U.S. crude is also in backwardation, with the strength of Brent and WTI taking the trading community by surprise after predictions that supply would outpace demand at the start of the year. The stronger market is a bonus for the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+. The group has been cutting supply for the past two years but has often struggled to achieve prices above $80 per barrel – the minimum most producers need to balance their budgets.

Brent traded at almost $84 a barrel on Thursday and has risen 9% this year. OPEC+ leaders have said backwardation is a positive market trend because it discourages traders from holding inventory to resell at a premium later, with low stocks also creating bullish market sentiment. The world’s onshore crude inventories sit at 4.4 billion barrels, their lowest level since the start of 2017 when intelligence firm Kpler began tracking the data, JPMorgan said in a report. “The physical sweet crude market is very tight,” said Black Gold Investors CEO Gary Ross, using a term for low-sulphur crude. Libyan outages, a U.S. cold snap that cut output and payment issues for some Russian supplies are among the reasons, he said. OPEC+ sources have said the group will decide in early March whether to extend oil-output cuts into the second quarter of the year or begin returning supply to the market.

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