By Robert Harvey and Natalie Grover
LONDON (Reuters) – Global physical crude oil markets are weakening due to weak refinery demand and ample supply, traders and analysts told Reuters, in a move that could mean further weakness for benchmark oil futures.
The weakness indicates that high interest rates and inflation are depressing industrial and consumer demand, especially in Europe, at a time when supply is increasing from non-OPEC producers such as the United States. This could reinforce the arguments for OPEC+ to maintain production restrictions at the June 1 meeting.
Demand from refiners is weak, although their crude input capacity has increased with the end of spring maintenance.
“The increase in refinery capacity was not met by an expected increase in demand,” said Saxo Bank analyst Ole Hansen.
“Consumers are feeling the pressure from high interest rates and inflation, as well as trade wars and a challenging geopolitical environment.”
The weakness is manifested particularly clearly in the North Sea, which produces oil grades that, together with US WTI Midland crude, underpin the Brent futures benchmark and help price two-thirds of the world’s oil.
The price differential for North Sea Forties crude fell on May 14 to a 97-cent discount to dated Brent, the largest since January 2023, according to data from S&P Global Commodity Insights, known as Platts.
Similarly, on May 13, Platts priced WTI Midland cargoes in Northwest Europe at Brent dated minus 69 cents, the lowest valuation since WTI joined the North Sea ratings that underpin the Brent benchmark. last May.
“It’s apparently a relatively benign period for demand,” said Sparta Commodities analyst Neil Crosby, adding that ample crude inventories may be delaying purchases. “For now, physical prices are under pressure.”
In addition to weak refining demand, the supply of light, low-sulfur crude oil, which competes with the North Sea, such as West Africa or the United States, has increased globally.
Ample supply is also evident in the structure of Brent’s short-term swaps – when ready-to-deliver crude oil trades at a discount of $1.07 per barrel to the July contract, as opposed to the $1.64 premium. dollars from a month ago.
The current structure is known as contango and indicates abundant immediate supply and weak demand. The opposite structure is known as backtracking.
WEAKNESS AROUND THE ENTIRE EDGE
In the United States, physical markets also slowed as US refinery throughput rates remained below regular seasonal levels despite the end of a maintenance season.
Louisiana Light Sweet crude oil prices fell to a three-week low of $2.33 per barrel against WTI on May 16, according to LSEG data.
The four-week average for U.S. refinery utilization was 88.7% for the week ending May 10, down from 91.2% in the same period a year ago, according to the U.S. Energy Information Administration .
At the same time, four-week averages for U.S.-supplied gasoline and distillate products, an indicator of demand, were 4-5% below 2023 levels.
Refinery profit margins around the world have weakened, in part due to the global drop in the value of diesel, a refined product essential to both the industrial and transport sectors.
PVM analyst Tamas Varga said the lower margins are a clear sign that refineries are producing too much fuel amid weak consumer and industry demand.
Lower profit margins have already led Asian refiners to process less crude in May, with others considering further cuts in the coming months, further reducing crude oil demand.
Restrictions on oil refining in Asia “signal a weak oil market,” said U.S. oil analyst Paul Sankey.
“The last leg of the refining balance is essentially Asia. It’s the first thing that closes” when markets are oversupplied, he said, adding that he expects OPEC to renew its voluntary cuts at its June 1 meeting.
Weaker Asian refining demand caused Middle East oil prices to fall, with Benchmark Dubai hitting a nearly two-month low of $81.24 per barrel on May 8.
It also left a surplus of Nigerian supply, forcing sellers to reduce prices on May cargoes to make up for the glut.
Nigeria’s Qua Iboe crude fell to $2.10 above Brent dated May 15, the lowest premium since February, according to LSEG data.
One Asian oil buyer, who asked not to be named, said he was holding off on purchases of West African and WTI oil until values fell further.
“They need to find ways out. (There’s) too much oil,” the buyer said.
(Reporting by Robert Harvey and Natalie Grover; additional reporting by Gary McWilliams and Liz Hampton in Houston and Florence Tan in Singapore; editing by Alex Lawler, Dmitry Zhdannikov and Susan Fenton)
