From Russia to Nigeria, crude values still depressed

Oil traders in barrels from Nigeria to Russia say that the physical market remains stubbornly weak in further evidence a global crude oil glut is proving much more difficult to clear. “I can’t remember when during such a correction (in futures), differentials and values in the physical market stayed so weak.

It tells me only one thing – the glut is still weighing on the market,” a trader in the Mediterranean market told Reuters. Oil prices have tumbled to around $40 per barrel from their 2014 peaks of $115 as a supply glut caused by a US shale boom was aggravated by an OPEC decision to open the pumps to fight for market share and depress output of high-cost producers.

As oil prices began their slide, traders of Nigeria, Russian, Azeri, Kazakh and Angolan oil rushed to offer their grades at steep discounts as they struggled to place it with buyers. The trend has continued for most of the past year, challenging the views from the likes of the International Energy Agency (IEA) and big producer, Saudi Arabia, which have repeatedly said that lower prices would spur demand and ultimately help clear the glut. “Strong demand? If it was as strong as everyone is saying, cargoes would be clearing much faster,” a Russian trader said.

Russian Urals crude has been trading at a discount of between $1 and $2 per barrel to benchmark dated Brent in northern Europe compared with a discount of less than $1 during most of 2009, when oil futures began a recovery from their 2008 lows. With futures prices now hovering around six and a half year lows, the physical market would typically begin to strengthen and signal a potential rebound in futures – in a repeat of patterns seen during the previous crisis of 2008/09.

Azeri Light is trading not far off its weakest premium to Brent since 2010 and Nigeria’s Qua Iboe grade – one of the key victims of the US shale boom, which almost fully displaced it from the American markets – is hovering not far off its lowest premiums to dated Brent in a decade. US bank, Morgan Stanley, one of the biggest players in commodities markets in the past decades, said this week that the latest weakness in oil futures appeared to be more driven by financials than physical markets.