Solid oil demand is driving up the spot crude prices in every part of the world. This is a clear indication that the physical oil market is finally catching up with the recent rally in the paper market.
The strengthening appetite for crude in Asia and tightening regional markets due to changed differentials between regional benchmarks are, in turn, supportive of the oil futures rally, analysts and traders tell Reuters.
The surging premium of Brent over the Middle Eastern benchmark Dubai now makes shipping crude grades from the Atlantic Basin to Asia uneconomic because they are priced off the Brent benchmark. So Asian demand for Middle Eastern and Russian grades priced off the Dubai benchmark is high, driving the spot premiums for Omani crude and Russia’s ESPO and Sokol grades close to a one-year high.
At the same time, the narrowing discount of WTI Crude to Brent Crude is effectively shutting the arbitrage for U.S. crude to go to Europe and Asia as the less-than-$2 a barrel spread makes shipping American oil to the major import markets uneconomical.
As a result of these dynamics in spreads between regional benchmarks, physical crude supply in each of the regions is tightening. First, because it’s uneconomical to import crude from other regions. Second, because oil demand is rebounding as the summer driving season begins and economies reopen from restrictions in mobility.
In the paper market, Brent Crude prices already hit $75 a barrel this week, for the first time in over two years. WTI Crude was above $73 early on Wednesday as demand strengthened and as U.S. crude oil inventories were estimated by the American Petroleum Institute (API) to have shrunk by 7.199 million barrels for the week ending June 18.
Backwardation in the WTI futures continues to tighten—a sign of a tighter market.
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