Oil rises as physical markets signal growing supply concerns


Oil rose for a third day as global output threats compound already red-hot markets for physical supplies and China cut its quarantine time for new arrivals.

West Texas Intermediate futures rose to trade near US$110, while the most notable moves in recent days have been in more specialist market gauges. A contract known as the Dated-to-Frontline swap — an indicator of the strength in the key North Sea market underpinning much of the world’s crude pricing — hits a record of more than US$5 a barrel. The rally comes amid growing supply outlets in Libya and Ecuador, exacerbating ongoing market tightness.

“We’re in the crunch period, it’s hard to see any meaningful price relief for crude,” said John Kilduff. There’s a lot of strength with China relaxing its COVID restrictions and starting its independent refiners, “we’re going to have another chunk of demand for crude oil,” as China relaxes its COVID-19 restrictions.

Oil is up about 50 per cent this year, but the strength in physical markets has run contrary to a sharp slide in headline prices in recent weeks. While fears of a global economic slowdown have weighed on futures, demand remains robust for now. US retail gasoline prices remain near record highs, causing pain for consumers a recovery from COVID-19 and a shortage of refining capacity to make fuels continues to keep prices at record highs.

The tight supply situation in is revealing itself in the WTI-Brent spread, grew to US$6.19, the widest in almost three months. “European demand will remain robust, especially as natural gas supplies run out, while the North American demand for crude is weakening,” said Ed Moya, senior market analyst at Oanda.

Prices

  • WTI for August delivery rose US$1.28 to US$110.85 a barrel at 11:52 am New York time.
  • Brent for August settlement gained US$1.98 to US$117.07 a barrel.

Oil also rose as’ broader sentiment was boosted by China’s move to half the amount of time new arrivals must spend in isolation, the biggest shift yet in its pandemic policy. Meanwhile, the G-7 told ministers to urgently discuss an oil price cap on Russia.

Travelers to China must spend spend seven days in centralized quarantine, then monitor their health for another three days at home, according to a government protocol. That compares with 14 days of hotel quarantine in many parts of China currently, and as many as 21 days of isolation in the past.

The prospect of additional supply from two of OPEC’s key producers also looks limited. French President Emmanuel Macron told US President Joe Biden that the United Arab Emirates and Saudi Arabia are already pumping about as much as they can. Macron was relaying a conversation he had with UAE ruler Sheikh Mohammed bin Zayed. OPEC+ ministers gather on Thursday.

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