By Joe Wallace 

Oil futures have rallied over the past week, lifted by hopes that the U.S. will join other producers in cutting production. But the price of actual barrels of oil has lagged behind, showing that supply is swamping demand as the coronavirus pandemic sparks a downturn in the global economy.

The price of Dated Brent, a key gauge of the market for oil cargoes in the North Sea, has been at least $5 a barrel lower than the price of Brent-crude futures since March 24. This gap expanded to $10.82 a barrel, its widest level for at least a decade, late last week.

The gap narrowed slightly to $8.90 on Tuesday, when Dated Brent cost $22.97 a barrel and Brent-crude futures settled at $31.87 a barrel.

Typically, Dated Brent and Brent-crude futures trade within a few dollars of each other. The divergence is a sign of strains in the physical oil market as traders scramble to find buyers or places to store crude.

"It shows there are no buyers," said Chris Midgley, head of analytics at S&P Global Platts. Platts has assessed the price of Dated Brent, which is widely used in contracts in the oil industry, daily since the 1980s.

The gloom in physical oil markets stands in contrast to the futures market, which investors use to bet on the direction of prices. Crude futures have rallied ahead of a virtual meeting of the Organization of the Petroleum Exporting Countries and its allies, led by Russia, on Thursday. U.S. Energy Secretary Dan Brouillette will talk with energy ministers from the Group of 20 nations on Friday.

Saudi Arabia and Russia have said privately they are open to reducing production only if the U.S. also agrees to mandate cutbacks. The White House plans to use forecasts that U.S. oil production is set to decline to show that American oil producers are lowering output.

Investors are hopeful that major producers will agree to lower output to ease pressure on the energy industry and on national budgets. Current output levels are expected to fill available storage capacity on land close to the brim within weeks as lockdowns wipe millions of barrels off the amount of oil the world consumes each day.

A deal to limit oil production would avert a "disorderly survival of the fittest" in which low prices force higher-cost producers out of business, said Jeff Wyll, an analyst at asset manager Neuberger Bermann. Still, Mr. Wyll expects there to be "more volatility, more downside" in oil prices over the coming weeks regardless of whether producers reach an agreement.

The gap between prices of oil barrels and oil futures "looks extremely wide," said Martijn Rats, an oil analyst at Morgan Stanley. It reflects that "the real crunch point for the oil market from a demand perspective is likely to be April," Mr. Rats added, before consumption starts to pick up in May and June.

The divergence between physical and futures prices creates an opportunity for some traders to make easy money, Mr. Rats said.

Traders are able to buy barrels of oil on the cheap and lock in a higher price for selling them in the futures market. Provided that the gap in prices is greater than the cost of storing the oil on land or at sea, they will make a profit.

Write to Joe Wallace at


(END) Dow Jones Newswires

April 08, 2020 10:18 ET (14:18 GMT)

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