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Sprint Past $129 even though market awash with Oil

The Wall Street Journal

Crude Logic: Spot-Market Supplies Are Plentiful, But Futures Extend Surge

Refinery Closures 
Curb Oil Demand; 
Bulls for Long Term
May 21, 2008; Page C6

LONDON — While politicians urge crude-oil producers to increase output to cool off record-high prices, traders of physical crude oil say their market is suffering from too much supply, not too little.

Crude-oil futures prices have repeatedly set record highs in recent months. Futures on the New York Mercantile Exchange settled Tuesday at a record $129.07 a barrel, up $2.02 — and up 99% from a year ago. The July contract for Brent crude stood above $127 a barrel Tuesday afternoon on the IntercontinentalExchange in London, up more than 80% from a year ago.


But traders dealing with physical cargos of crude tell a different story. They see a spot market so awash with oil that some producers, such as Iran, are starting to horde it in hopes that greater demand 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 off line in recent months, including the region’s largest, Royal Dutch Shell PLC’s 420,000-barrel-a-day Pernis refinery. The Rotterdam, Netherlands, facility underwent partial maintenance for more than a month starting at the end of March.

Because prices for gasoline and other refined products haven’t risen as much as prices for crude, refiners have had little incentive to hurry their maintenance processes, and some of those able to operate at normal levels have opted to cut back production. French investment bank Société Générale SA said Tuesday that global cracking margins — the profits refiners garner from processing crude into high-quality end products — have fallen to less than $7.50 a barrel this month, about half the level at this time last year.

In another sign of weakening demand for spot crude, on Tuesday the widely traded Forties crude grade was offered at a $1-a-barrel discount to the benchmark North Sea mixture. In the same period last year, contracts traded at a 50 cents-a-barrel premium to the benchmark. The North Sea benchmark price comprises a basket of four crude oils: the Brent, Forties, Oseberg and Ekofisk North Sea grades.

“There are two different dynamics in the crude-oil market,” said 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 is being stored in 10 to 12 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 gasoline — have 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 supplies to be less scarce in the short term than they will be further into the future.

While demand remains low, it should pick up in coming weeks as refiners bring back the region’s remaining idled refineries from maintenance and ramp up production for the summer — when demand for motor fuels reaches its peak.

In the North Sea spot crude market, the June exchange-of-futures-for-physical contract, which lets holders of Brent crude futures swap the contract for physical crude, traded May 12 at a record low discount of 78 cents compared with the futures-contract price, according to Platts. That compared with a premium of five cents a month earlier.

The sharp decline in the EFP value represents extremely low demand for physical delivery of North Sea crude.

In the market for Russian Urals cash crude oil, cargos have traded at a $5.10 discount to the North Sea benchmark price, the lowest level since August 2006, Platts said. Urals prices could sag even further in the coming months after Middle Eastern producers lowered prices for their crude-oil grades, another trader said.

“There’s various signals out there saying for right now, the markets are well supplied with crude,” said Mike Wittner, global head of oil research at Société Générale in London.

But few participants say they 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, noting that long-term technical charts continue to point toward higher prices.

And while the discount between near-term contracts and those for delivery further into the future has widened, absolute prices are still high. Monthly Brent-crude-oil futures contracts — which are available for the next eight years — all settled above $125 a barrel Monday, according to the IntercontinentalExchange.

“The structure is telling you there is a little more crude available today than there is tomorrow, but the absolute level is saying the market is still tight,” said Harry Tchilinguirian, senior oil-market analyst at BNP Paribas in London.

In other commodity markets:

SILVER: Prices rose more than 4% on record-high oil prices and a falling dollar. Lightly traded nearby May silver rose 69.7 cents to close at $17.671 while most-active July rose 69.7 cents to $17.725 an ounce on the Comex division of the New York Mercantile Exchange. Silver prices can experience larger jumps that gold as the gray metal trades in a smaller market and is more widely used for industrial purposes than is gold.

CORN: Futures rose on higher crude-oil prices and continued behind-average planting progress by farmers. Chicago Board of Trade July corn gained three cents to $5.8975 a bushel.

–Angela Henshall contributed to this article.

Write to Nick Heath at [email protected] and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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