Physical oil markets tread water in hope of summer demand rebound

London — Physical crude markets are treading carefully after the OPEC+ alliance decided to keep supply tight in April, even as crude futures rallied sharply.

Despite a much tighter picture that has pushed oil prices to a 14-month high, oil demand is still short of reaching pre-pandemic levels of 100 million b/d. But trading sources and analysts expect a steep demand boost to kick in from late April, especially in Europe and the US, which will also result in a much tighter market.

The demand picture is expected to turn from next month, when more economies are likely to open up, with the loosening up of mobility restrictions.

S&P Global Platts Analytics expects global oil demand to grow by 250,000 b/d in April over March, before surging 1.9 million b/d higher in May and another 3.3 million b/d in June.

"The OPEC+ decision to keep back April supply will clearly trigger tighter markets, as April loaders will be needed for increased summer refinery runs," Platts Analytics said in a recent note.

The OPEC+ alliance, influenced by Saudi Arabia's cautiousness, has decided to keep a tight leash on supply through at least April.

Physical vs. paper

The lag between paper and physical Brent prices continues to persist a tug of war between a slow oil demand recovery and an artificially tight oil market.

ICE Brent futures rose to $71.38/b on March 8 on news that raised fresh concerns over the security of supplies from Saudi Arabia, the world's biggest crude exporter, amid its ongoing proxy war in Yemen against Houthi rebels. This was its highest level since Jan. 8 last year, but prices have fallen slightly since then and were trading just over $68/b in European trading the afternoon of March 9.

In contrast, the Dated Brent assessment that underpins the majority of the world's oil trade has ranged between $67-$69/b this week.

"The physical complex is [still] struggling in the prompt all around," said a Europe-based crude trader. "I think the market will do alright a bit later once summer comes and if demand resurfaces."

ICE Brent crude futures prices have risen at a faster pace recently, drawing strength from rising equities markets, OPEC+ compliance and higher vaccinations.

But the signs on the physical market, however, remain mixed, with muted physical cargo trading activity in the past week.

China slowdown

This paradox is well reflected in the Atlantic Basin, which is seeing some length with an overhang of West African crude starting to put pressure on the market.

Angolan crude, which makes for a key diet of Chinese refiners, normally sells swiftly. But the recent trading cycle has been sluggish as maintenance in China has resulted in a small overhang of both March- and April-loading cargoes, which is very rare.

A Chinese-focused grade like Republic of Congo's Djeno has suffered from a lack of demand, with China's independent refiners particularly hard-hit by higher flat prices.

Djeno has been trading at a discount of Dated Brent minus $1/b this week, the lowest in over four months, according to S&P Global Platts data.

The slowdown in Chinese demand is also one of the reasons why Saudi Arabia decided to continue its voluntary crude production cuts through April, according to trading sources.

The Saudi oil minister has repeatedly warned the market will not be as strong as it looks, with upcoming seasonal refinery maintenance, still-bloated oil inventories and continued lockdowns in many countries.

"I belong to the school of being conservative," Prince Abdulaziz bin Salman said last week at the OPEC+ meeting. "The right course of action now is to keep our powder dry, and to have contingencies in reserve to insure against any unforeseen outcomes."

But with Chinese refineries returning from maintenance in May, which coincides with higher demand expectations in the West, the oil market is banking on a burgeoning summer.