Throughout February, Brent Crude prices have consistently held above $80 per barrel, signaling a tightening in the physical market. OPEC+ production cuts persist, and ongoing rerouting of cargoes away from the Red Sea and the Suez Canal is contributing to this market dynamic.
European refiners are actively seeking Atlantic Basin cargoes due to delays in arrivals from the Middle East. These delays, extending at least two weeks, result from the longer route tankers must take via the Cape of Good Hope to reach the Mediterranean and Norwest Europe. Consequently, prices for North Sea and West African crude grades have surged, providing robust support to Brent Crude prices above $80 a barrel and deepening the backwardation in the futures curve.
Backwardation, indicative of a market deficit, is observed when front-month contract prices surpass those further out in time. The intensified backwardation curve suggests a tightening market, with analysts noting that supplies may be tighter than market sentiment and price action imply.
Lower production and exports in this quarter from OPEC+ producers, particularly major Middle East exporters, are contributing to supporting oil prices during a period when global oil consumption is traditionally lower.
Despite earlier projections of weak prices and oversupply in the market at the start of 2024, oil prices are holding steadfast above $80 a barrel this month, providing a positive outlook for OPEC+ producers.
The tighter market conditions are not solely attributed to OPEC’s efforts. Disruptions in Red Sea/Suez Canal traffic have significantly influenced the rise in prices of Atlantic Basin crudes and higher refining margins in the early months of this year.
Increased diversions of crude oil shipments around the Cape of Good Hope have been notable this month, reaching a peak of 1.6 million barrels per day in the first week of February. The majority of diversions are focused on westbound flows of Middle Eastern crude destined for Europe, with the Red Sea disruptions prompting six out of eight cargoes of Iraqi crude bound for Europe to be diverted via the Cape of Good Hope.
The impact is also seen in Europe’s increased demand for crude oil from closer destinations, raising prices for Nigerian grades. Analysts at consultancy FGE highlight that while global crude balances may lengthen seasonally in February and March, the heightened levels of Red Sea shipping diversions are keeping the market tight.
U.S. benchmark oil prices are similarly influenced by higher demand for American crude in Europe due to disruptions in Red Sea flows. The arbitrage for U.S. crude to Europe improved in late January-early February, with a wide MEH/Brent differential and reduced transatlantic freight. However, recent higher European buying of U.S. crude has led to a closure of the arbitrage, suggesting that the current strength in WTI futures structure could be short-lived, according to FGE analysts.