Europe, Africa oil markets tighten, lending support to futures

Red Sea shipping delays and Opec+ supply cuts are tightening physical oil markets in Europe and Africa as well as the Brent crude market structure, lending further support to oil futures prices, according to traders, LSEG data and analysts.

A sustained rise in crude prices would lift energy, transportation and manufacturing costs and threaten to unwind some of the recent falls in global inflation, just as major central banks are expected to begin cutting interest rates.

On Thursday, the benchmark Brent crude futures market structure hit its most bullish since October. The premium of the first-month contract to the six-month contract reached $4.34 a barrel. This structure, called backwardation, indicates a perception of tight prompt supply.

"It looks like there has been a pick-up in (tanker) diversions, which is making the crude balance tighter," said FGE analyst James Davis. Crude demand is high because of strong refining margins, despite refinery maintenance, he added.

More tankers are avoiding the Red Sea since Yemen's Houthis began drone and missile attacks against shipping in mid-November, saying they are acting in solidarity with Palestinians as Israel wages war on Hamas.

January average refining margins for diesel and gasoline in Europe rose to multi-month highs of $34.3 and $11.6 a barrel, respectively, Reuters calculations show.

US crude is also in backwardation, with the strength of Brent and WTI taking the trading community by surprise after predictions that supply would outpace demand at the start of the year.

The stronger market is a bonus for the Organization of the Petroleum Exporting Countries and its allies, known as Opec+. The group has been cutting supply for the past two years but has often struggled to achieve prices above $80 per barrel – the minimum most producers need to balance their budgets.

Brent traded at almost $84 a barrel on Thursday and has risen 9% this year.

Opec+ leaders have said backwardation is a positive market trend because it discourages traders from holding inventory to resell at a premium later, with low stocks also creating bullish market sentiment.

The world's onshore crude inventories sit at 4.4 billion barrels, their lowest level since the start of 2017 when intelligence firm Kpler began tracking the data, JPMorgan said in a report.

"The physical sweet crude market is very tight," said Black Gold Investors CEO Gary Ross, using a term for low-sulphur crude. Libyan outages, a US cold snap that cut output and payment issues for some Russian supplies are among the reasons, he said.

Firmer Footing

Opec+ sources have said the group will decide in early March whether to extend oil-output cuts into the second quarter of the year or begin returning supply to the market.

"The market has found a firmer footing with Brent trading above $80 for a while now, supported by what looks like a better-than-expected demand outlook together with the...tanker diversions keeping millions of barrels at sea for longer," said Ole Hansen, Saxo Bank's head of commodity strategy.

"Opec+ I'm sure will be very pleased."

In the North Sea crude market, the differential of Forties crude to benchmark dated Brent has reached the highest since late November and the prices of some other grades considered local alternatives to Middle East crude have soared.

In October, about 1.07 million bpd of Middle Eastern crude came to Europe, Kpler data showed, with volumes falling in the following months amid the Red Sea attacks and expected to average about 606,000 bpd in February.

"Delays to shipments from East of Suez...are making crude closer to home more attractive," a European crude trader said. "The offers for West Africa and North Sea crude reflect that."

"Refining margins in Europe for Angolan crude are very favourable and Nigeria is selling cargoes faster than it has for months."

Nigerian Forcados crude was offered this week at dated Brent plus $6.00 a barrel, the highest since October LSEG data showed. Nigerian grades Qua Iboe and Bonny Light have firmed to dated plus $3.80 and $3.00, respectively.

In Asia, Middle East cash crude differentials have stayed pretty stable month on month, suggesting Europe and African crude is seeing the bulk of the strength.

US crude has been mixed. On the light side, there has been some tightness due to a cold snap last month hitting Permian production, while March loadings to Asia are set to pick up after a weak January and February.

An unplanned outage at BP's Whiting refinery has pushed some heavy Canadian crude into the Cushing storage hub and so there is currently little tightness.

India's Jan oil imports hit record high on Red Sea delays

India's crude oil imports rose to a monthly record in January after the Red Sea shipping crisis delayed the December arrival of cargoes from the Americas, data from trade sources showed.

The world's third largest oil importer and consumer also received in January its first cargo of Venezuelan oil after a gap of more than three years, as the US eased sanctions on the South American producer, the data showed.

India's oil imports hit 5.24 million barrels per day (bpd) in January, up 17% from December and 3.5% higher than in the corresponding month a year earlier, according to the data.

The previous monthly high in India's imports was 5.1 million bpd in Jan 2018, the data showed.

The trade estimates are higher than Thursday's preliminary data from the oil ministry showing India's January oil imports at a 21-month high of 21.39 million metric tons (5.1 million bpd).

"Some U.S. and Latin American oil cargoes were delayed as they had been diverted to an alternative route around the Cape of Good Hope after the Red Sea crisis and those cargoes landed in late December or January," said LSEG analyst Ehsan Ul Haq.

An official with one Indian refiner confirmed that some cargoes it was scheduled to receive in December had been delayed until January.

Even though long-haul crude cargoes, mainly from the Americas, are purchased on a delivered basis, Indian buyers had to pay extra charges as sellers invoked a force majeure clause after freight and insurance costs jumped due to the Red Sea troubles, said the source, who spoke on condition of anonymity.

India's Russian oil imports in January rebounded from December to 1.47 million bpd, posting growth of 10.8% but Russia's share of the total declined to 28% from 30%, while Latin America's share rose to about 8% from 6%, the data showed.

Indian refiners turned to nearby suppliers in the Middle East to avoid disruption from the delays and make up for the diversion of Russian light sweet Sokol oil, supplies of which were hit by payment woes and tougher Western sanctions.

Top refiner Indian Oil Corp, a key buyer of Russian Sokol oil, had to draw from its inventories to make up for the shortfall.

January imports from Iraq surged to the highest since August 2019, raising the share of Middle Eastern oil in India's overall imports to 54%, from 48% in December 2023, the data showed.

The rise in Middle East imports lifted OPEC's share in India's intake to about 54% in January, although the average is at its lowest on a financial-year basis.