According to traders and analysts speaking to Reuters, the world’s physical crude oil markets are contracting due to a lack of demand from refineries and an abundance of supply. This development might lead to additional declines in benchmark crude futures.

The downturn shows that, at a time when supply is increasing from non-OPEC suppliers like the United States, high interest rates and inflation are suppressing consumer and industrial demand, particularly in Europe. This might strengthen the case made by OPEC+ at its meeting on June 1 to keep the output cuts in place.

Refiner demand is weak despite an increase in their ability to absorb crude once springtime maintenance has ended.

Ole Hansen, an analyst at Saxo Bank, stated, “Rising refinery capacity has not been met by an expected rise in demand.”

“Consumers are feeling the pressure from high interest rates and inflation, as well as trade wars and a challenging geopolitical environment.”

The North Sea, which supplies crude grades that, together with U.S. WTI Midland crude, back the Brent futures benchmark and aid in the pricing of two thirds of the world’s oil, is where the weakening is most evident.

Based on data from S&P Global Commodity Insights, a division of Platts, the price difference of North Sea Forties crude decreased on May 14 to a discount of 97 cents to dated Brent, the largest since January 2023.

The pricing of WTI Midland cargoes in Northwest Europe was also evaluated by Platts on May 13 at dated Brent minus 69 cents, which was the lowest evaluation since WTI joined the North Sea grades that support the Brent benchmark last May.

“It is seemingly a relatively benign period for demand,” said Sparta Commodities analyst Neil Crosby, who added that ample crude inventories could be delaying buying. “For now, physical pricing is under pressure.”

In addition to the sluggish demand for refining, there has been an increase in the availability of light, low-sulfur crudes from countries like West Africa and the United States that compete with the North Sea.

The structure of short-term Brent swaps, where crude for quick delivery trades at a $1.07 per barrel discount to the July contract rather than a $1.64 premium a month ago, also demonstrates ample supply.

The current configuration, referred to as a contango, signifies low demand and plenty, timely supplies. Reverse structure is referred to as backwardation.

Despite the completion of a maintenance season, U.S. refinery processing rates have remained below usual seasonal levels, which has led to a softening of physical markets in the country.

LSEG data shows that on May 16, prices for Louisiana Light Sweet crude dropped to a three-week low of $2.33 per barrel above WTI.

The U.S. Energy Information Administration reports that the four-week average of U.S. refinery utilisation for the week ending May 10 was 88.7%, which is lower than the 91.2% recorded during the same time last year.

Simultaneously, the four-week averages for distillate product supplied and petrol in the United States, which provide as a proxy for demand, were 4-5% lower than 2023 levels.

Diesel is a crucial refined product for both the transportation and industrial sectors, and its value has declined globally, which has reduced refinery profit margins.

Lower profits, according to PVM analyst Tamas Varga, are an obvious indication that refiners are producing too much fuel in the face of weak demand from consumers and businesses.

Asian refiners have processed less crude oil in May due to lower profit margins, and some are planning to make further reductions in the upcoming months, which would further lower the demand for petroleum.

Reductions in oil refining in Asia “signals a weak oil market,” according to American energy specialist Paul Sankey.

Asia is basically the final leg of the refining balance. When markets are oversupplied, it’s the first thing to shut down, he said, adding that he anticipates OPEC will extend its voluntary cuts at the June 1 meeting.

Middle East crude prices have fallen as a result of weaker refining demand in Asia; on May 8, Benchmark Dubai hit a nearly two-month low of $81.24 a barrel.

In order to clear an excess supply for May shipments, vendors were compelled to lower their rates due to the excess supply from Nigeria.

According to LSEG data, on May 15, Nigerian Qua Iboe crude dropped to $2.10 over dated Brent, the lowest premium since February.

Unnamed Asian customer stated he was delaying buying WTI and West African crude until prices plummeted much lower.

“They must locate outlets. The buyer stated, “(There is) too much oil.”

(Adapted from MarketScreener.com)

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