The oil market is suddenly being gripped by a divergence between futures and physical prices, something that’s playing out in two closely watched versions of Brent crude.
In the last couple of weeks, Brent futures – where billions of dollars of contracts change hands every day – climbed about $10 a barrel to a five-month high near $112. The rally has been driven by traders trying to gauge whether the US will escalate the Iran war after the midterm elections, and as Saudi Arabia faced Houthi attacks after the Yemeni militant group briefly shut down the kingdom’s key western export pipeline.
Yet there has been a plunge in Dated Brent, a marker that assesses the value of barrels in the real world and which matters to physical commodity traders across the globe. It’s near $120, down roughly $15 in less than two weeks. Similar benchmarks in the Middle East have also slid.
There are a number of factors dragging down prices in those markets for physical supplies, albeit from extremely high levels. Shipments through the Strait of Hormuz are holding near pre-war levels, with some cargo trackers even seeing flows above that rate, even as Iranian attacks in the crucial waterway have become more frequent and damaging.
The cost to hire tankers has also cooled a bit, making it less expensive to deliver barrels across the world than it was earlier this month. The costs have been so high this year that they’ve kept more oil close to where it’s produced, with Asian buyers shunning American crude, in turn bolstering the amount available in Europe over the coming weeks, weighing on the region’s prices.
If supplies are sustained and freight keeps sliding, it could leave oil futures susceptible to a fall in the coming weeks.
Still, some traders say it’s brave to wager against fresh supply disruptions, especially as this year has seen major Middle East oil producers come under attack, stockpiles tumble and an unprecedented shortage of tankers.
‘There’s still plenty of headline risk at play. Oil stocks are quite low and it’s difficult to see them rebuilding given current dynamic,’ said Ryan Fitzmaurice a senior commodity analyst at Marex. ‘At the same time, there are ways the market can find an out: Hormuz flows are strong and El Niño could weigh on heating demand this winter.’
The price of Dated Brent and futures are different because they reflect prices over different time periods. Traders use the spread between the two as a gauge of how strong or weak oil markets are in general. While Dated’s premium has fallen significantly recently, it remains much higher than it would be in normal times relative to futures.
Prospects for flows
Traders have good reason to be wary about whether a surge in Middle East flows can be sustained. For example, shipments jumped after the US and Iran agreed an interim peace deal in late June that allowed vessels to escape Hormuz.
That extra supply hitting the global market caused prices to crater and sent the regional Dubai market into a bearish contango structure that indicates oversupply. But within weeks, hostilities resumed and shipments through the vital waterway suffered more disruption.
Since then, flows through Hormuz have jumped. Though estimates vary, most trackers see crude shipments either close to or above pre-war levels. That rebound, along with the drop in shipping costs, has weighed on Middle Eastern crude prices in recent weeks.
Price differentials for various crude grades from Oman to Iraq have all been coming off, with barrels delivered to Asia recently sold at an above-$10-a-barrel premium to the Dubai benchmark. While still elevated, that’s down massively from premiums of roughly $35 seen last month, said traders familiar with the matter, who aren’t authorized to speak to the media.
Derivatives linked to the Middle East’s Dubai benchmark have also weakened alongside the prices of real-world barrels from the region. Prompt timespreads for the oil – the difference between this and next months’ contracts – weakened to under a dollar a barrel in backwardation this week, versus a gap of around $15 a month ago, traders and brokers said.
billboards do the job socmed
‘Middle Eastern producers have sold huge volumes for autumn loadings via tenders,’ said Ed Hayden-Briffett, a research analyst at The Officials, an arm of Onyx Capital Group. In contrast, benchmark Brent crude futures ‘are more susceptible to headline noise and the grind is naturally upwards.’
Options markets
The split between bulls and bears is also showing up in the options market.
In recent days, hundreds of thousands of bearish put options that would profit from a drop in Brent back below $100 have changed hands, pushing options volumes to a record.
However, people involved in options markets said that they’ve also seen interest in buying bullish call options over recent weeks. They said the split in trading activity reflects a mix of positions, with some expecting a fresh escalation in the Iran war in the coming weeks, and others expecting a retreat in oil prices.