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.


Female pilots bear brunt of airline job cuts

Updated 22 September 2020

Female pilots bear brunt of airline job cuts

  • Under layoff agreements between airlines and unions, junior pilots lose their jobs before senior ones, regardless of gender, race or age

MONTREAL: When Megyn Thompson landed her dream job as a commercial pilot last year, she was one of thousands being recruited globally to boost the number of women in the cockpit and meet record pilot demand.

Now an industry-wide campaign to recruit more female aviators is under threat, dealing a blow to efforts to overhaul the male-dominated airline sector as the coronavirus crisis transforms a shortage into a pilot surplus. 

In the United States alone, the top two airlines are set to furlough more than 3,000 pilots when government stimulus expires this month, and a disproportionate number of those are women.

Under layoff agreements between airlines and unions, junior pilots lose their jobs before senior ones, regardless of gender, race or age.

These “Last In, First Out” labor deals at many Western airlines mean the most recent hires are the first to go.

And those new hires include a higher percentage of women than in the past, the International Society of Women Airline Pilots (ISWAP) said.

Thompson, who flies with a regional carrier owned by American Airlines, is among at least 600 female pilots in the United States who will be furloughed on Oct. 1 unless there is more government payroll aid or last-minute union deals.

Thompson, 32, said her low seniority ranking puts her “smack-dab in the middle” of a furlough at American’s PSA affiliate, which expects to cut about 35 percent of its pilots.

“If you go back 40 years ago it was a man’s world through and through, so there are not a lot of women at the top who are protected from this furlough,” said Thompson, who decided not to have biological children as she built flying hours for her license.

“PSA is not letting (me) Megyn go because they don’t like her. It’s zero to do with that and 100 percent to do with, if you’re the last in, you’re the first out.”

Now the mother of three adopted children is applying for jobs at Amazon, Kellogg and PepsiCo.

Before the crisis, global air travel was growing at a record 5 percent a year, generating a need for 804,000 pilots over the next 20 years, based on Boeing Co. estimates. The need for more pilots had pushed female recruitment to the top of the agenda.

But a shattered post-COVID industry does not expect traffic to regain 2019 levels and start growing again before 2024.

“This year we were meant to launch a great big campaign which we have just put on hold because of what has happened,” said Australian pilot Davida Forshaw, who heads education and outreach at ISWAP.

Despite the female recruitment campaign, just 5.3 percent of airline pilots globally were women before the coronavirus crisis, ISWAP data shows. That percentage is set to drop again as airlines carry out furlough plans, the group predicts.

At American and Delta Air Lines, women make up around 5.2 percent of the combined pilot population of about 27,800 and 6.7 percent of the 3,645 pilots whom those airlines expect to furlough, according to numbers provided by their main pilot unions.

American Airlines declined to comment directly on the issue, but a spokesman said the union data implied that the proportion of female pilots would slip post-furloughs to 4.9 from 5.1 percent.

Delta said it was in discussions with unions on pilot departures but did not give a breakdown by gender.