MOSCOW (MRC) -- The oil futures market is pricing in tighter supplies due to OPEC-led production cuts and recovering demand as lockdowns to contain the coronavirus outbreak are eased, suggesting a huge inventory buildup could slow and start to be drawn down, reported Reuters.
Brent crude futures for July are trading at the smallest discount to the contract six months in the future since March. A price structure where oil for immediate delivery is cheaper is called contango. A narrowing contango usually points to supplies becoming more constrained.
At the same time, the price of North Sea physical oil compared with dated Brent - the benchmark used to price most of the world’s cargoes - has recovered from historic discounts and is moving toward parity.
The changes arise against the backdrop of supply cuts led by the OPEC+ group of oil producers and reductions by other producers, such as the United States. Government lockdowns to limit the spread of the coronavirus have also begun to be eased, pointing to a recovery in fuel use.
"The supply and demand balance is tightening," said Olivier Jakob, analyst at Petromatrix. "The physical market is moving towards some rebalancing and away from the heavily over-supplied condition."
The record contango that arose due to the collapse in demand caused by the lockdowns had encouraged a vast buildup of oil in storage that had strained available storage capacity and led to a record amount held in ships at sea.
Now the incentive to keep adding to storage has weakened. Crude traders said demand for oil for immediate delivery had increased, as supply cuts had surprised on the upside.
"There is an improvement. People are getting back to work," a North Sea trade source said. "Hopefully we’ll see some crude that’s in storage being drawn on."
Another trade source said the narrowing contango was creating a temptation to offload some stored crude, or at least to swap the oil being held in tanks for another grade if it was in higher demand.
Still, the physical rally could have run too fast. Eugene Lindell, analyst at JBC Energy, said a drop in refinery profit margins could put a brake on the gains.
"The physical differentials are currently doing very well," said. The big fly in the ointment is that crude buying interest is ebbing given weak refinery margins on the back of elevated product stocks. Hence, we are cautious on the sustainability of this mini rally - at least in the short term."
As MRC informed previously, global oil consumption cut by up to a third. What happens next in the oil market depends on how quickly and completely the global economy emerges from lockdown, and whether the recessionary hit lingers through the rest of this year and into 2021.
Earlier this year, BP said the deadly coronavirus outbreak could cut global oil demand growth by 40 per cent in 2020, putting pressure on Opec producers and Russia to curb supplies to keep prices in check.
We remind that, in September 2019, six world's major petrochemical companies in Flanders, Belgium, North Rhine-Westphalia, Germany, and the Netherlands (Trilateral Region) announced the creation of a consortium to jointly investigate how naphtha or gas steam crackers could be operated using renewable electricity instead of fossil fuels. The Cracker of the Future consortium, which includes BASF, Borealis, BP, LyondellBasell, SABIC and Total, aims to produce base chemicals while also significantly reducing carbon emissions. The companies agreed to invest in R&D and knowledge sharing as they assess the possibility of transitioning their base chemical production to renewable electricity.
Ethylene and propylene are feedstocks for producing polyethylene (PE) and polypropylene (PP).
According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 557,060 tonnes in the first three month of 2020, up by 7% year on year. High density polyethylene (HDPE) and linear low density polyethylene (LLDPE) shipments rose because of the increased capacity utilisation at ZapSibNeftekhim. Demand for LDPE subsided. At the same time, PP shipments to the Russian market was 267,630 tonnes in January-March 2020, down 20% year on year. Homopolymer PP and PP block copolymers accounted for the main decrease in imports.
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