EghtesadOnline: An overhang of unsold crude in the Atlantic Basin has halved in recent weeks, suggesting oil traders are bracing for a further supply loss from Iran due to US sanctions and a new rally in prices.
Iran’s oil exports are already dropping fast as refiners scurry to find alternatives ahead of a reimposition of US sanctions in early November, which in turn has helped drain a glut of unsold oil, Reuters reported.
The millions of unsold barrels of crude that had pooled around northwest Europe, the Mediterranean and West Africa over July and August are rapidly draining.
A months-long surplus in the West African market that depressed prices to their lowest in months has almost vanished, according to Financial Tribune.
Traders had said just one week ago that leftover crude from the August and September loading schedules amounted to some 30 cargoes, equivalent to an average 930,000 barrels per day.
Now, that overhang has dwindled to a handful of unsold cargoes, while demand for October-loading Angolan oil, the favored West African grades for Chinese refiners, has been even more robust than that for September.
“The overall situation ... is that US sanctions toward Iran are now increasingly kicking in, which will help to dry up the physical crude oil market and place it back into solid backwardation,” SEB head of commodities, Bjarne Schieldrop, said in a note this week.
“This will shift the front end Brent crude oil price into the higher $70s range with a touch of $80s.”
The belief that supply will fall short of demand is reflected in the futures market when the price of a prompt-dated contract rises above that of a longer-dated one, a situation known as backwardation.
With a little over nine weeks until possibly more than 1 million bpd of Iranian supply is off the market, Brent futures are now at their closest to backwardation in almost a month, leaving the front-month October contract LCOc1 just 35 cents below November LCOc2, nearly half what it was in late July.
Concern over oil demand, particularly in China, has been put to rest, for now at least.
Consumption by China’s independent refiners, or teapots, has picked up sharply in August to around 1.4 million bpd, up 40% from near-record lows in July, as plants return from prolonged summer maintenance.