Saturday 22 July 2017

Weak physical oil market hits hedge funds

The signs of physical oversupply abound from Europe to West Africa to the US. A North Sea grade that helps to set the global Brent benchmark is trading near its weakest in almost two years. Photo: Stock image
The signs of physical oversupply abound from Europe to West Africa to the US. A North Sea grade that helps to set the global Brent benchmark is trading near its weakest in almost two years. Photo: Stock image

Alex Longley, Javier Blas and Rupert Rowling

The real world of oil trading - where actual cargoes are bought and sold - is doing little to help the hedge funds and other speculators who placed record bets that Opec and its allies would drive up prices.

Saudi Arabia, Russia and other big producers are trying to clear a global crude glut, but three months into the effort the physical oil market is still signalling plentiful supplies. The persisting excess offers little comfort to financial traders, whose bets that futures prices will rise equate to about $50bn in nominal terms.

The signs of physical oversupply abound from Europe to West Africa to the US. A North Sea grade that helps to set the global Brent benchmark is trading near its weakest in almost two years. In West Africa, lacklustre demand means Angolan crude cargoes are selling more slowly than in previous months. In America, a closely watched price relationship between the crude in a production region in Texas and a storage hub is flashing oversupply too.

"The physical market is not really on fire," said Olivier Jakob, managing director of consultancy Petromatrix.

"The Opec cuts were good enough to prevent a repeat of the glut of last year, but it's a different story if you want to have oil at $60 or $70."

Brent crude futures traded at $52.02 a barrel at 1:51 pm on Friday on the ICE Futures Europe exchange in London.

While few expected Opec and 11 other producers to eliminate a surplus overnight, the oil glut punishes bulls by dragging down futures markets that are ultimately anchored to physical price benchmarks.

Even though banks including Morgan Stanley, Bank of America and Citigroup expect higher prices later this year, investors have been closing their bets on a rally since late February.

The value of long positions for Brent and West Texas Intermediate crude, the global and US benchmarks, reached a combined $56bn on February 23, the highest since Opec announced the output cuts in November. Those bets, measuring futures and options positions, indicated that investors expected prices to rise. In recent days, the value of those contracts has dipped to $49.3bn. In barrel terms, speculative trades reached a record on February 24.

The sell-off in financial markets comes as the physical market shows continued signs of oversupply. Cargoes from Angola for loading in April are selling more slowly than in previous months, according to four traders. Vitol Group recently released barrels of Nigerian oil it had been storing in South Africa, adding immediate supplies to the market. Total SA followed suit this week.

Bloomberg

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