The Oil Market Is in the Grip of a Panicked Race for Barrels

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(Bloomberg) — While investors focused on the fragile Iranian ceasefire this week, a desperate scramble for cargoes has been playing out in the oil market, as traders and refiners scour the globe for immediately available supplies. 

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In the North Sea, the world’s most important physical crude market, traders submitted 40 bids for cargoes this week, only four of which were met by offers. Cargoes for delivery in the coming weeks changed hands at unprecedented prices above $140 a barrel. Elsewhere, refiners have been hunting increasingly further afield for supplies, leading to a series of unusual trades and surging premiums for any oil that’s ready to ship right now.

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Traders said the panicky moves across the world’s key physical oil markets demonstrated the scale of the shortfall in crude that’s due to be felt in the coming weeks, as the loss of supplies from the Middle East leaves a growing gap.

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Skyrocketing prices are signaling that some European refiners will likely need to follow those in Asia and cut back production, they said — a move that might help to balance the market for crude oil but would deepen the shortfalls in vital products like diesel and jet fuel.

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“There is simply a shortage of crude,” said Neil Crosby, head of research at Sparta Commodities AS. “Physical Brent is a mess and has now risen too far. At this rate even European refiners will have to lower utilization, perhaps as early as next month.”

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The frenzy in the physical oil trade stands in contrast to the futures market, where oil for delivery in June dropped 13% this week to close at about $95 a barrel, amid optimism over the ceasefire. 

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There were some early signs of increased activity in the Strait of Hormuz on the weekend, with two Chinese supertankers and one from Greece moving through the waterway, but traffic still remains well below pre-war levels. And even if the talks this weekend do lead to the resumption of normal flows through the strait, relief is unlikely to come soon enough to prevent a crunch. It takes weeks for crude from the Gulf to reach refineries in Asia and Europe.

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“The final cargoes that transited the Strait of Hormuz before the conflict are now arriving at their destinations. This is where the paper traded markets are meeting physical reality, and the 40-day gap in global energy flows is truly exposed,” Sultan al Jaber, chief executive office of Abu Dhabi National Oil Co., said in a Linkedin post on Thursday.

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That gap can be seen in the premium refiners are willing to pay to secure cargoes of crude that are available in the near term. Traders at some Asian refineries, speaking on condition of anonymity, said they were no longer focused on price, and were simply seeking to secure barrels of crude wherever they could to ensure energy security. 

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Dated Brent – the most important benchmark in the physical oil market used to price millions of barrels a day – hit a record $144 a barrel before the ceasefire this week, surpassing its 2008 highs even as futures remain far below their record levels. 

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By Friday it had dropped to $126 a barrel, still more than $30 above June delivery Brent futures, while traders including Trafigura Group and Gunvor Group were bidding more than $22 a barrel above Dated Brent for cargoes of oil in the North Sea for delivery in late April and early May. Supplies from Nigeria for loading next month have been offered as high as $25 per barrel above the benchmark, compared with less than $3 before the Iran war began.