FEATURE: Brent backwardation as steep as it has ever been
2nd February 2022 15:09 GMT

If they want it fast, buyers have to pay top dollar for crude oil. Across the Brent crude complex, the market structure has moved into one of the steepest backwardations ever seen, a sign of a tight market and a factor that has been changing oil flows and buying and selling behavior.

A financially calculated Dated Brent forward curve on Feb. 1 showed a sheer drop of $2.82/b between balance-month February and March contracts. A forward curve calculated that way has never been steeper.

When the March Cash BFOE forward contract expired on Jan. 31, it did so at a value $1.96/b higher than the April contract. S&P Global Platts records show that, even at times of over $100/b crude in the 2010s, there hasn’t been a steeper structure since 1990 -- few crude traders can remember a time when the prompt price of oil was so much higher than future loadings.

With both OPEC+ and other suppliers unable to keep pace with global demand growth as coronavirus restrictions ease, booming product markets have meant crude buyers have been scrambling to secure prompt loadings, driving that sharp structure.

"The oil market is currently unreservedly bullish. It is international tension, the perception of tight supply and the cold winter that are the most important factors behind the strength," PVM analysts said in a note.

Buyers change their behavior

Like the Brent structure resembles when represented on a graph, market players have a mountain to climb in securing oil and they have been adjusting their behavior as a result.

A backwardated market is one that discourages storage, with many refiners instead buying as last minute as possible, according to market sources. This strategy does however come with its own risks as those buyers left short in such a tight market are still left having to bid up in order to entice others to release barrels, market participants said.

A typically prompt-trading part of the crude complex, the effects of backwardation have stalled trading activity in Mediterranean and Black Sea markets somewhat.

“End-users will not want to hold more inventory than is strictly necessary… buyers are not willing or able to continue to pay these kinds of levels,” a crude trader in the region said.

Buyers there came back in the new year with empty tanks due to beneficial tax reasons and bought heavily in January, leaving them in a position where they can wait for differentials to fall before stocking up again, sources said.

Shifting oil flows

The steep backwardation also leaves buyers looking to local grades in order to reduce the impact of the market structure.

“Shorter haul barrels [are more] valuable versus longer haul [barrels] with steep backwardation,” one North Sea trader said, referring to the strong demand for the local Northwest European grades.

Backwardation is particularly painful for sellers of long-haul crude grades as the relatively long sailing time to buyers carries with it the cost of that Brent structure. West African crudes are a prime example and, while values have been supported by a global shortage of sweet crudes, sellers have found prompt-loading parcels hard to shift.

“Residual February barrels are getting crushed with Dated Brent strength,” a West African crude trader said. “Sellers are showing crazy numbers at the back with time value then discounting by like $1/b once it gets prompt.”

For buyers in Asia, the structure has meant local alternatives that have a Dubai pricing basis may start to offer better value than arbitrage flows from the Atlantic basin, according to analysts and traders.

“Premiums on Dubai-related grades are strong, as those physical differentials are capturing the cost of opportunity compared to more expensive long-haul grades,” S&P Global Platts Analytics said.

Bunkerworld .,
2nd February 2022 15:09 GMT