BY LANANH NGUYEN
AND NICK HEATH
LONDON-Politicians may be urging crude-oil producers to boost their output to cool off record-high prices, but traders of physical crude oil say their market is suffering from too much supply, not too little.
Crude-oil futures prices have repeatedly hit record highs in recent months. The July contract for Brent crude was trading above $127 a barrel Tuesday afternoon on the IntercontinentalExchange in London, up more than 75% from a year ago.
Yet traders dealing with physical cargos of crude oil see a spot market so awash with oil that some producers, such as Iran, are starting to hoard it in hopes that greater demand for crude will lift spot prices as well. They cite seasonal closures of refineries for maintenance and a poor return on refining operations for the lack of interest in buying spot cargoes.
Some of Europe's biggest refineries have been taken offline in recent months, including the region's largest Royal Dutch Shell PLC's giant 420,000-barrel-a-day Pernis refinery. The Netherlands plant underwent partial maintenance for more than a month starting at the end of March.
Because prices for gasoline and other refining products haven't risen as much as prices for crude oil, refiners have had little incentive to hurry their maintenance processes, and some of those able to operate at normal levels have opted to reduce production. French investment bank Societe Generale said Tuesday that global cracking margins-the profit refiners earn from processing crude into high-quality end products-have fallen to less than $7.50 a barrel this month, approximately half the level at this time last year.
In another sign of weakening demand for spot crude, the widely traded Forties crude is now selling at a discount of 75 cents a barrel to a benchmark North Sea mixture, swinging from a premium of about 15 cents a barrel a year ago.
"There are two different dynamics in the crude-oil market," says Olivier Jakob, managing director of Swiss consultancy Petromatrix. "We're making record highs after record highs on the [futures] price, but physical economics are not really showing any signs of distress."
Last week, Iran's departing OPEC governor, Hossein Kazempour Ardebili, said around 25 million barrels of his country's heavy, sour crude oil are being stored in offshore vessels in the Persian Gulf. "There are simply no buyers because the market has more than enough oil," Mr. Ardebili said.
Meanwhile, some light, sweet crude-oil grades-typically prized by refiners for their easy conversion into high-quality diesel and gasolinehave also come under pressure. While light, sweet crude future prices have showed little signs of slowing, their price structure is starting to hint at an easier short-term supply outlook. Futures prices for ICE Brent crude for the coming months flipped in early May into what's known as "contango," when near-term contracts are cheaper than contracts for delivery in the future.
A contango structure usually indicates that oil-market players expect crude-oil supplies to be less scarce in the short term than they will be in the future. While demand remains low, it should pick up in the coming weeks as refiners resume production at plants idled for maintenance and ramp up production for the summer season, when demand for motor fuels reaches its peak.
Few participants think oversupply in the spot market will keep futures prices from continuing their relentless surge.
"There seems plenty of product around for now, but people are still long-term very bullish," said Glen Ward, an energy broker at ODL Securities in London.
-Angela Hen shall
contributed to this article.
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