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.

Dubai airport prepares for ‘slow recovery’

Updated 28 October 2020

Dubai airport prepares for ‘slow recovery’

  • CEO urges countries to move away from mandatory quarantines on arriving passengers

DUBAI: Dubai International Airport, the world’s busiest for international travel, is getting busier. But it’s a long way from what it once was amid the coronavirus pandemic as it prepares for a possible “extended, slow recovery,” its CEO told The Associated Press.

After long-haul carrier Emirates drastically cut its flights in March and slowly resumed its routes, passenger numbers at the mammoth airport serving East-West travel have crept up to over 1 million a month — just below 15 percent of what they were a year ago, CEO Paul Griffiths said.

To boost those numbers, Griffiths is urging countries to move away from mandatory quarantines on arriving passengers and toward the strategy embraced by Dubai. That includes aggressive coronavirus testing before departure, followed by mandatory mask-wearing on aircraft and testing on arrival.

“What we have to do is take appropriate measures to control and manage the risk, which actually are acceptable. I mean, life is full of risk management. It’s not all full of risk elimination,” Griffiths told the AP in an interview. 

“Surely the same should apply to the virus. We need to get it under control to minimize the risk of infection.

“And that can be done with some of the measures that we’ve got available to us without prolonging the social and economic damage that is currently being inflicted.”

Across the wider Middle East, passenger numbers this year are expected to reach only 60 million, down from 203 million in 2019, according to the International Air Transport Association. That’s only 30 percent of last year’s numbers.

The recovery may take years. By 2021, the trade group hopes to see 90 million travelers in the Mideast, still drastically lower than 2019. In order to get passengers flying before a vaccine is widely available, the IATA is calling for mass, rapid testing of passengers rather than quarantines by countries.

Those quarantines hobble those considering taking a trip, Griffiths said. Instead, countries should move toward offering electronic “health passports” or other measures to aid in ensuring safety while in the air.

Griffiths said he believed air travel, with passengers properly masked, remained safe. Anecdotal evidence cited in a Journal of Travel Medicine article published in September showed no passengers contracted the coronavirus on five Emirates eight-hour flights to Hong Kong despite having 58 passengers spread among the flights who tested positive on arrival.

“Travel and tourism and the ability of people to freely move about their business every day is actually something that would kick-start the economy,” Griffiths said. “And the key of that is the international travel and the use of aircraft has already been proven to be pretty much advanced in controlling the spread of the virus.”

For Dubai, the resumption of flights remains deeply in their business interest.

Emirates remains the linchpin of the wider empire known as “Dubai Inc.,” an interlocking series of businesses owned by the city-state. The Investment Corporation of Dubai, a sovereign wealth fund, owns Emirates in its entirety, as well as the lucrative Dubai Duty Free.

Those duty free sales in 2019 accounted for $2 billion in revenue, including over 15 million cigars and 2.9 million bottles of perfume. 

The corporation did not respond to a request for comment on 2020 sales, though its last financial report acknowledged “measures to contain the virus have resulted in temporary closure of the stores.”

Some duty free shops have reopened in parts of the airport in the time since. Dubai authorities also have given Emirates a $2 billion bailout while laying off thousands of staffers. 

As far as the airport, Griffiths said he “cannot rule out” the need to fire some of its over 2,000 employees if there’s a slow recovery.

Dubai reopened for tourists in July, even as neighboring Abu Dhabi still requires even UAE residents to have just-received virus test results to come into the emirate. There’s a noticeable uptick in flights in the air as Emirates offers touchless check-ins and other measures to woo travelers.

Still, Emirates’ iconic fleet of double-decker Airbus A380s largely has been grounded. At the start of the year, the world saw 2,400 flights by the aircraft a week — the majority of those by Emirates, according to the flight-tracking website At most now, there are just over 100 flights a week — the majority of them still flown by Emirates, the website said earlier this month.

“The thing is that what we’ve got to understand is that air travel will bounce back. We will get back to levels that we’ve seen before,” Griffiths said. 

“We just can’t say how long and when. And the 380 will once again come into its own once those volumes return.”