Crude oil prices in some of the world’s main physical markets have weakened due to a jump in freight costs and a drop in refining margins, according to traders and LSEG data, suggesting demand weakness that could filter through to the futures market.
Falling prices for physical crude could presage a fall in crude futures. Brent crude futures have risen above $87 a barrel from the low $70s in June due to OPEC+ supply cuts, and more recently on concern that exports from the Middle East could fall if the conflict in Gaza widens.
West Africa’s two biggest crude exporters – Nigeria and Angola – have sizable overhangs for loadings scheduled for November. Crude premiums to benchmark prices have come down by $1 to $2 a barrel depending on the grade, traders said.
“This could be the start of things to come,” FGE analyst James Davis said last week, referring to the weaker West African differentials.
“Globally, demand is tracking sideways from here, and we’re going to see increases in crude supply from non-OPEC. Come January, the market could start looking a bit longer.”
Crude output from the U.S., the biggest non-OPEC supply source, hit a record 13.2 million barrels per day earlier this month. Physical markets in other parts of the world are also weakening.
The premium of North Sea Forties to dated Brent has weakened to $1.65 a barrel, according to LSEG data, down from plus $2.48 on Oct. 11, while the U.S. cash crude market has broadly weakened over the last week, traders said.
Forties is one of the largest North Sea grades that helps set the value of dated Brent, used as a benchmark in physical crude trading around the world.
“Generally, the North Sea is weaker as margins are weak and refiners don’t want to stock up before end of year,” a crude trading analyst who declined to named said.
Refining margins have weakened worldwide, particularly for gasoline and naphtha, in part due to the end of the U.S. summer driving season and rising U.S. gasoline inventories, as well as the rising cost of crude.
Sweet and sour U.S. crude grades alike have weakened, with WTI Midland dropping to a 10 cent premium to U.S. crude futures this week, the weakest since December, and West Texas Sour trading at a $1.75 discount, weakest since March.
For West African crude demand to pick up again, premiums need to come down further, traders said. Otherwise, prices for oil products to need to rise proportionally, FGE’s Davis said.
Some West African crudes hit multi-month highs in early October. For instance, Nigeria’s Bonga crude was offered at a premium of $9 a barrel to the benchmark dated Brent, while Escravos and Forcados were on offer in excess of $8.
However, freight rates have since jumped and refiners’ profit margins have narrowed, weighing on demand.
As of Tuesday, there were 20-30 cargoes of Nigerian crude left, and about 6-7 cargoes of Angolan crude for November, far more than is typically expected to be left over at this stage of the trading cycle, traders and an analyst told Reuters.
The market is “very, very sluggish,” another trader said. “The market is going down, margins look bad,” said a third.
Angola’s December loading schedule is already out and has yet to find any buyers, as are plans for December loading for some Nigerian grades.
The jump in freight costs followed two developments – the Hamas cross-border attack on Israel on Oct. 7 and the United States on Oct. 12 imposing the first sanctions on owners of tankers carrying Russian oil priced above the G7’s $60 cap.
Key freight rates for crude have jumped, according to LSEG data, including routes from West Africa to demand centres such as China.
Refining margins have weakened in response to higher outright crude prices during October, traders said. Dated Brent reached over $94 a barrel on Oct. 13, some $3 short of 2023’s high, before falling back, according to the LSEG.
Margins for European naphtha and gasolines have weakened significantly in the past few weeks, a trader said. Another said the profit margins for naphtha and fuel oil had slipped to negative territory.
(Additional reporting by Ahmad Ghaddar and Stephanie Kelly in New York; Editing by Dmitry Zhdannikov, Simon Webb and Mike Harrison)