Divergence in Oil Prices Shows Collapse in Demand
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
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
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 Joe.Wallace@wsj.com
(END) Dow Jones Newswires
April 08, 2020 10:18 ET (14:18 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.