LONDON/BANGALORE/SINGAPORE- Frantic oil buying driven by supply outages and signs the Omicron variant won’t be as disruptive as feared has pushed some crude grades to multi-year highs, suggesting the rally in Brent futures could be sustained a while longer, traders said.
Prices for physical cargoes do not always trade in tandem with oil futures and when differentials widen rapidly and considerably, they can indicate speculators have oversold or overbought futures versus fundamentals.
Brent oil futures have jumped 10 percent since the start of the year but the physical market is still racing ahead, with differentials for some grades hitting multi-year highs, suggesting a tight market will push the futures rally on.
“These are crazy numbers. There clearly is physical tightness,” a North Sea oil trader said.
Oil prices edged up on Monday as investors bet supply will remain tight amid restrained output by major producers with global demand unperturbed by the Omicron coronavirus variant.
Brent crude futures gained 9 cents, or 0.1 percent, to $86.15 a barrel. Earlier in the session, the contract touched its highest since Oct. 3, 2018 at $86.71.
US West Texas Intermediate crude was up 29 cents, or 0.4 percent, at $84.11 a barrel, after hitting $84.78, the highest since Nov. 10, 2021, earlier in the session.
The gains followed a rally last week when Brent rose more than 5 percent and WTI climbed over 6 percent.
Frantic oil buying, driven by supply outages and signs the Omicron variant will not be as disruptive as feared for fuel demand, has pushed some crude grades to multi-year highs, suggesting the rally in Brent futures could be sustained a while longer, traders said.
The Organization of the Petroleum Exporting Countries, Russia and their allies, together known as OPEC+, are gradually relaxing output cuts implemented when demand collapsed in 2020.
Key benchmark grade Forties traded at a fresh two-year high on Thursday at Dated Brent plus $1.80 a barrel.
Other North Sea grades have also hit one or two year highs. Prices for key west African grades like Nigeria’s Bonny Light have jumped too since the start of the year.
The tightness began in the Atlantic Basin and spread as Asian buyers were forced to look for cheaper cargoes elsewhere. Differentials for crude from Oman, the UAE and Russia’s Far East have jumped as Brent crude’s premium to Dubai swaps is at its widest in two months.
Several factors have fuelled prices. After the wildfire spread of Omicron in the fourth quarter, oil demand has not been badly hit in a surprise to refiners that had reduced purchases. Now, they suddenly have to make up for the gap.
