Physical oil and futures align to tell story of a tighter market

New marine fuel regulations from 2020 are encouraging refiners to switch to crude grades that produce smaller quantities of high-sulfur fuel oil. (AFP)
Updated 23 November 2019

Physical oil and futures align to tell story of a tighter market

  • Premiums for heavier grades continue to rally because of the continuing US sanctions on Iran and Venezuela

LONDON: The physical crude oil market and the structure of the oil futures curve have rarely been more aligned over the past few years than in recent weeks, and they tell a counter-intuitive story of a tight oil market next year. 

While OPEC and the International Energy Agency point to a swelling oil glut next year due to booming non-OPEC supplies including in the US, the physical market offers a different story. Traders are prepared to pay near-record premiums for sweeter barrels as new marine fuel regulations from 2020 encourage refiners to switch to crude grades that produce smaller quantities of high-sulfur fuel oil. 

However, premiums for heavier grades, which produce more fuel oil, also continue to rally due to a deficit created by US sanctions on Iran and Venezuela. In addition, the structure of the oil futures market shows that premiums of front months to later dates – known as backwardation – have narrowed in recent weeks, also suggesting the market’s expectations of a glut are diminishing somewhat. 

To be sure, benchmark oil futures do not necessarily follow the physical market and could still decline next year if global oil demand falls because of the US-China trade dispute or if US oil output surprises again on the upside. Soaring physical crude prices are also negatively impacting refining margins, often prompting refiners to cut processing. New marine fuel rules have created a rally in certain crude oil grades. 

From January 2020, the United Nations’ International Maritime Organization (IMO) will ban ships from using fuels with a sulfur content above 0.5 percent, compared with 3.5 percent now, unless they have sulfur-cleaning kits called scrubbers. 

Nigeria’s biggest crude stream, Qua Iboe, is valued at a premium of $3.30 a barrel, the highest since 2013, Refinitiv Eikon data shows. Azeri Light, or BTC, has a premium of $5.10 to the benchmark, its highest since 2013. 

Both crudes are valued especially highly by simple refineries as they are ideal for producing IMO-compliant bunker fuel oil, said Eugene Lindell, an analyst at JBC Energy in Vienna. “The focus now is on not producing high-sulfur fuel oil at all costs. If you are a simple refinery, it comes down to choosing the right crude,” he said. “The end result is a lot of people are going to be seeking these grades and that boosts the price. They will remain strong and may increase further.” 

While the rally in those two light, sweet grades stands out, sour crudes such as Russian Urals have been supported by other factors. Urals in northwest Europe is trading at a premium of $1 a barrel to dated Brent, a record high. “The strength in sour crudes, despite IMO 2020, is due to the loss of sour crude supplies from Venezuela and Iran and high demand for heavy molecules to feed the conversion units of more complex refineries,” analysts at Energy Aspects wrote. 

US sanctions on Iran and Venezuela have forced the two OPEC members to cut oil exports sharply, tightening the market for sour crude. Voluntary OPEC cuts due to a supply pact that producers are expected to renew in December have also curbed output. Expectations of a growth slowdown in US shale could also tighten the market further. North Sea crude grades, which underpin the Brent futures contract, are also rallying. Ekofisk, one of the five grades that can set the value of dated Brent, jumped to its highest since 2013 on Tuesday.

The rally in physical crude is being reflected in strengthening time spreads in the Brent futures market, even though the outright price at $62 a barrel is well below this year’s high of $75. The first-month Brent contract is trading at a premium to the second month, indicating current tight supply. 

Backwardation persists for future months, although it becomes shallower next year. 

“We expect Brent oil prices to continue trading around our $60-a-barrel forecast with backwardation likely to persist as the ongoing OPEC cuts and slowing shale activity offset rising other non-OPEC supply and moderate demand growth,” Goldman Sachs said in a report this month.


Apple, Google drop Fortnite from app stores over payments

Updated 14 August 2020

Apple, Google drop Fortnite from app stores over payments

  • Google said Fortnite will remain available on Android, just not through its app store
  • Apple and Google both take a 30% cut from in-app revenue purchases in games

NEW YORK: Apple and Google dropped the popular game Fortnite from their app stores after the game’s developer introduced a direct payment plan that bypasses their platforms.
Apple and Google both take a 30% cut from in-app revenue purchases in games, which has long been a sore spot with developers.
Fortnite is free, but users can pay for in game accoutrements like weapons and skins. Its developer, Epic Games, said in a blog post Thursday that it was introducing Epic Direct payments, a direct payment plan for Apple’s iOS and Google Play. Epic said the system is the same payment system it already uses to process payments on PC and Mac computers and Android phones.
Apple and Google said the service violates their guidelines.
“Epic enabled a feature in its app which was not reviewed or approved by Apple, and they did so with the express intent of violating the App Store guidelines regarding in-app payments that apply to every developer who sells digital goods or services,” Apple said in statement.
Google said Fortnite will remain available on Android, just not through its app store. Android users can download the app from other app stores, although that’s generally not an option for iPhone users.
Epic Games did not immediately return a request for comment. Epic’s Fortnite Twitter account said the company would debut a new short film called “Nineteen Eighty-Fortnite,” a seeming parody of Apple’s iconic “1984” commercial that introduced the Macintosh computer. It has also filed a complaint against Apple in the US District Court in Northern California for dropping Fortnite.