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Tight Physical Crude Market, Pointer To Higher Oil Prices

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A tight physical supply
in crude markets could send oil prices even higher.
Demand has proven to be more resilient to the effects of Omicron than many analysts had originally thought.
With both the physical and futures markets rallying, and increased geopolitical premium, market observers are looking towards the $100 mark for oil prices.
Prices of physical crude cargoes have rallied this year, signaling resilient global oil demand even in the face of record-high COVID cases in the Omicron wave. Crude grades from the United States, Africa, the North Sea, the Middle East, and Russia have seen a significant increase in their prices in recent weeks, suggesting that the physical demand for oil is tight across the world.
The tightness in the physical crude prices is reflected in the oil futures market where the backwardation — the state of the market signaling tight supply — has increased for both major benchmarks, Brent and WTI.
The tight physical supply of oil points to further gains in the futures market, where Brent Crude prices hit a fresh seven-year high at over $87.80 a barrel early on Tuesday — the highest price for Brent since October 2014.
Part of the rally in recent days was the result of heightened geopolitical tensions in the Middle East and the Russia-West standoff over Ukraine. But the other major driver was the tight supply on the market, with physical cargo prices rallying, outages in major producing countries, and demand resilient to the Omicron wave.
Traders and refiners seem to believe that the feared threat to demand from the new variant was overblown, and are now back to the market buying cargoes much more than they did at the end of November and early December when the impact of Omicron was still a very large looming threat.
Strong Physical Oil Demand
Since the start of the year, prices of crude cargoes that will end up in two or three months in the world’s largest importing region, Asia, have rallied strongly, as refiners are back on the market following some hesitancy at the end of 2021 amid the unknown effects of Omicron on demand.
Consumption is resilient, disproving fears of a new dip, and holding up stronger than many analysts and forecasters, including the International Energy Agency, had predicted.
Global oil demand has proven to be more resilient to the effects of the Omicron variant’s spread than the IEA expected, Executive Director Fatih Birol said last week.
“Demand dynamics are stronger than many of the market observers had thought, mainly due to the milder Omicron expectations,” Birol said, as quoted by Bloomberg.
As a result of this resilient demand, refiners are buying cargoes, which raises the prices of physical crude from every part of the world.
“These are crazy numbers. There clearly is physical tightness,” an oil trader in the North Sea region told Reuters this weekend.
The premiums for the Forties and Ekofisk grades from the North Sea are at their highest in two years. The prices of crude grades from West Africa have also jumped amid low Libyan supply in recent weeks.
The Bakken crude from North Dakota is also trading at its highest level compared to benchmarks in nearly two years, according to Bloomberg’s estimates.
Price differentials of grades from Russia and the Middle East have also increased to the highest benchmarks in several months.
“Buyers are snapping up everything,no matter what grade,” an oil trader from the U.S. tells Reuters.
“The physical crude market is way over the forward or futures contracts. It implies genuine prompt tightness,” PVM Oil Associates’ analyst, Tamas Varga, told Bloomberg last week.
Physical Tightness Reflected In Oil Futures Market
This week, PVM Oil Associates said in a note on Monday that “Positive developments were in focus and there is a genuine belief that physical demand will keep exceeding supply and in return this perceived bullish backdrop will further encourage investors to remain faithful to our market.”
The tight physical market suggests the futures market has further room to rally, traders and analysts say.
“The prompt spreads in WTI and Brent remain elevated at 63 and 74 cents per barrel, thereby signaling rising tightness,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Monday.
”Speculators, a little late to the recent rally, boosted bullish oil bets in WTI and Brent bets by the most in 14 months last week,” Hansen added, noting that the combined net long — the difference between bullish and bearish bets — in Brent and WTI jumped last week by the most since November 2020 to reach 538,000 lots or 538 million barrels. This is still well below the most recent peak at 737,000 lots from last June, he said.
$100 Oil?
With both the physical and futures markets rallying, and increased geopolitical premium, market observers are again posing the question: how far can this rally go?
According to the world’s largest independent oil trader, Vitol, oil prices — at a seven-year-high early on Tuesday—are justified and have further to go.
Triple-digit oil “is in the works” for the second quarter, Francisco Blanch, head of global commodities at Bank of America, told Bloomberg last week.
Demand is recovering meaningfully, while OPEC+ supply will start leveling off within the next two months, Blanch said, noting that Russian supply will level off and it will be only Saudi Arabia and the United Arab Emirates (UAE) that can produce incremental barrels to add to the market.
Of course, risks to the downside haven’t gone away. The biggest unknown and the largest potential headwind to near-term global demand is China, and whether it would continue to apply its zero-COVID policy, BofA’s Blanch said. Large lockdowns in the world’s top oil importer could reduce consumption and potentially, Chinese oil imports.
Refinery maintenance in the spring could also slow down the physical oil market, analysts say.
Yet, the oil rally may not be over just yet, especially if demand continues to reflect just a “mild Omicron effect.”

By: Tsvetana Paraskova
Paraskova reports for Oilprice.com.

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NB, Konexa Boost Renewable Energy

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Nigerian Breweries (NB) Plc has signed a power purchase agreement with Konexa, an integrated energy development and investment platform to deliver 100 per cent renewable energy that will cover the electricity needs of its two breweries – Kakuri and Kudenda, in Kaduna State.
Under the 10-year agreement, Nigerian Breweries has outsourced the power supply for its breweries, converting from fossil fuels into a full-service renewable energy solution, using hydro-power sources.
This step is in line with its business strategy and ‘Brew a Better World’ sustainability agenda. The project is co-funded by Climate Fund Managers and Konexa.
The Managing Director, NB, Mr. Hans Essaadi, described the agreement as another significant step in the company’s journey in its quest to operating a carbon-neutral plant in future, adding that its partnership with Konexa will reduce its energy costs and cost of production.
“By 2030, we want to become a standard reference point in Nigeria when it comes to sustainability and efficient use of resources. Under our ‘Brew a Better World’ agenda, we are taking several bold steps to become a carbon-neutral company”, Hans explained.
The Commercial Director at Konexa, Joel Abrams, explained that the agreement was part of Konexa’s commitment to supporting industry, national governments and utilities to achieve clean and reliable 24-hour-a-day power.
He added that the partnership anchors Konexa’s confidence in the power sector and will bring long-term investment and world-class operations to support the sector’s sustainability by improving reliability, quality of service, and job creation.
“We are very pleased to be part of the energy transition that Nigerian Breweries Plc. is leading. This agreement is particularly significant in the current context of increasing energy costs from traditional fossil fuels.
“This type of solution can apply to many businesses across Nigeria, allowing them to obtain cost-effective power from a reliable partner while focusing on their core business,” he stated.
The Chief Investment Officer, Climate Fund Managers Tarun Brahma, n his part,  said, “we are proud to support Konexa and look forward to actively supporting Nigerian Breweries Plc. as they demonstrate leadership in driving the decarbonisation of their operations in Nigeria”.
Last year, NB Plc inaugurated its 663.6 KWP solar power plant at its Ibadan brewery, which supplies 1GWh yearly to the brewery while reducing its carbon emissions by 10,000 tonnes over a 15-year lifespan of the plant.

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NLNG Bags FIRS’ Most Supportive Taxpayer Award

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The Nigeria Liquified Natural Gas (NLNG) Limited has been recognised by the Federal Inland Revenue Service (FIRS) as its most supportive taxpayer.
The recognition was conveyed in a statement by the Executive Chairman of FIRS, Mr. Muhammad Nami, in which he commended the 20 top-performing taxpayers whose compliances to tax obligations helped the service surpass its N6 trillion tax collection target in 2021.
Nami said FIRS was particularly pleased that the feat was achieved, and it was possible to provide the government with the necessary funds to meet its social contracts with the citizens despite the very harsh global economic conditions imposed by the lingering COVID-19 pandemic.
The country’s top-performing taxpayers were scheduled to be unveiled, recognised and awarded by President Muhammadu Buhari at an exclusive dinner during the FIRS 2022 National Tax Week, but the event was cancelled due to the unfortunate attack on the Kaduna-Abuja railway on the 28th of March 2022.
Reacting, the Managing Director and Chief Executive Officer of Nigeria LNG Limited, Dr. Philip Mshelbila, said the award was coming at an auspicious time when the company was celebrating its 33rd Incorporation Anniversary and taking stock of its programmes and their impact on the lives of Nigerians and the country.
Mshelbila reiterated NLNG’s commitment to its vision of “helping to build a better Nigeria” and stated further that “the Company still has more to give by making gas count for the country and representing Nigeria in the league of top gas producers in the world.”
He affirmed the Company’s commitment to fulfilling its tax obligations in line with its vision of being a globally competitive LNG company helping to build a better Nigeria; and also thanked the board, management and staff of NLNG for their continued support.

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‘Oil Market Fears Recession More Than Tight Fuel Inventories’

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The oil market saw an other volatile week as bullish and bearish catalysts collided.
There is a growing fear that a potential recession could weigh heavily on oil demand.
Overall, the market appeared more concerned about the rising odds of a recession rather than falling U.S. fuel inventories to multi-year lows.
The oil market wrapped up another volatile week of hectic trading, swinging up and down in a $5 a barrel range as it was pulled between bullish and bearish catalysts in both directions every day.
Both benchmarks hit an eight-week high early on Tuesday, only to pull back later in the day and join on Wednesday the sell-off on Wall Street triggered by renewed investor concerns about a possible recession as top retailers flagged soaring costs and supply chain bottlenecks in their quarterly earnings reports.
In the week to May 20, oil market participants paid more attention to “recession fear” headlines than to the weekly U.S. petroleum status report, which showed another draw in gasoline inventories and higher implied domestic demand, which, despite record-high gasoline prices in America, is only set to rise further as we enter the summer driving season.
“The market is reacting to all sorts of different headlines hour to hour, and the movement in oil markets on a day-by-day basis getting even more exaggerated,” Andrew Lipow, president of Lipow Oil Associates in Houston, told Reuterson Thursday, when oil settled higher after the U.S. dollar weakened, following a plunge in crude prices in earlier trading on the same day.
Overall, the market appeared more concerned about the rising odds of a recession rather than falling U.S. fuel inventories to multi-year low levels for this time of the year.
Investors and speculators pulled back from oil, with crude being a riskier asset, as concerns about a more pronounced global economic slowdown—and even a recession—intensified and dampened risk appetite.
“The possible easing of U.S. sanctions against Venezuela could be considered another bearish factor, coming in addition to the Hungarian veto on the EU’s plan to ban Russian oil,” Sebastien Bischeri, Oil & Gas Trading Strategist at Sunshine Profits, wrote inInvesting.com.
The EU is still struggling to persuade Hungary to accept an EU embargo on Russian oil imports. Adding to bearish factors were fresh COVID outbreaks in China, where Shanghai is tentatively reopening, but infections are rising in the Beijing area.
However, while the market is focused on gloomier economic outlooks, it has ignored—at least this past week—the critically low U.S. fuel inventories.
Not that oil demand has soared so much. It’sthe capacity for supply, globally and in the U.S, that is now a few million barrels per day lower than it was before the pandemic.
Rising demand since economies reopened and people returned to travel, combined with lower refining capacity and very tight distillate markets have drawn down U.S. product inventories to below seasonal averages and at multi-year lows, with record-low inventories reported on the East Coast.
Total motor gasoline inventories decreased by 4.8 million barrels in the week ending May 13, and are about 8% below the five-year average for this time of year, the EIA said in its latest weekly inventory report on May 18. Implied gasoline demand, measured as products supplied, rose, despite record-high prices across the United States.
Gasoline inventories in the U.S. are at their lowest levels for this time of the year since 2014, with stocks on the East Coast even tighter, at their lowest since 2011 for this time of the year.
“While refiners have some room to increase runs (utilization rates increased by 1.8 percentage points to 91.8% over the week), gasoline demand should increase as we move into driving season, which suggests that we will see further tightness in the US gasoline market.
In this case, we are likely to see further pressure on the US administration to try rein in gasoline prices,” ING strategists Warren Patterson and Wenyu Yao wrote on Thursday.
According to Bjarne Schieldrop, Chief analyst, Commodities, at SEB:
”The global refining system is severely stretched following reductions in capacities in 2020/21, reviving oil product demand along with re-openings with Russia/Ukraine issues on top. We are now heading into summer driving season with much higher gasoline demand with a start-out of very low inventories.”
Concerns about economic growth, and consequently, demand for fuels, are yet to be reflected in actual data, Saxo Bank said on Thursday.
“On the ground, however, this worry has yet to be reflected with inventories of crude oil and gasoline still falling while US implied gasoline demand, despite record prices, remains robust.
“Meanwhile, in China the easing of lockdowns is not going well with fresh outbreaks slowing the pace towards normalisation. Until then, the market is likely to focus on the general level of risk appetite, which is currently challenged,” Saxo Bank’s strategy team noted.

By: Tsvetana Paraskova
Paraskova writes for Oilprice .com.

 

 

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