Physical oil is more expensive than futures: Market panics over supply disruptions

Physical crude oil prices hit a record close to $150 a barrel on Tuesday. They were far above the prices of futures contracts traded on commodity exchanges and reported in the daily news media. Reuters reported this. Prices for physical crude oil deliveries are key for refineries, which buy the raw material and process it into petroleum products, including gasoline and diesel.

Record prices for some grades of crude oil have hit refineries in Asia and Europe. The high prices reflect the impact of the conflict in the Middle East, where US and Israeli forces attacked Iran on February 28. Traders are monitoring the situation even after the ceasefire agreement accepted by the United States and Iran overnight.

Oil is traded in two basic ways. Most trading takes place on paper on exchanges, where the contracts are futures for oil to be delivered in the future. Traders buy them and, in the vast majority of cases, get rid of them before the contracts expire. The second way is through actual transactions that result in physical delivery of the crude. These mostly take place outside public markets and are typically arranged between producers and buyers, mainly refineries.

The war with Iran has cut at least 12 million barrels of oil a day from Middle Eastern supplies, due to Iran’s effective closure of the Strait of Hormuz. That volume represents about 12 percent of global supply. The price of the futures contract on North Sea Brent crude reached as high as $119.50 a barrel in March, its highest level since 2022. It therefore did not reach the 2008 record of $147.50 a barrel. The nearest Brent contract is now for delivery in June.

Competition between Asian and European refineries to replace lost oil supplies from the Middle East has pushed up prices for alternative grades available for prompt delivery, for example from Europe and Africa. This was also a key reason why the price of US light crude West Texas Intermediate (WTI) rose above the price of Brent. WTI and Brent are the two most important crude oil grades traded around the world.

Some grades of crude oil have therefore reached record prices. The price of North Sea Forties crude hit $146.09 a barrel on Tuesday, according to LSEG data, surpassing its 2008 level to reach an all-time high.

The main factor driving up prices for oil grades such as Forties is supply panic, noted oil trader Adi Imsirovic. “When there is a real physical shortage, people aren’t thinking about supplies in July—that is, June loadings and futures prices—but about oil NOW,” he added.

The price of Forties and many other grades around the world is linked to the so-called benchmark for physical crude oil prices, known as ‘dated Brent’. According to LSEG data, it is trading almost $20 higher than Brent futures for delivery in June. This is because it reflects the price of oil for immediate delivery, also known as the spot price.

“The market is currently desperately seeking immediately available barrels suitable for refineries. Tensions are therefore first showing up in the part of the benchmark that is closest to current problems with physical oil supplies,” analysts at investment bank Morgan Stanley said in a report to clients.

S&P Global Energy Platts set the price of ‘dated Brent’ at $144.42 a barrel on April 7, surpassing the previous record of $144.22 set in 2008, a Platts spokesperson said. Under this methodology, the price of Forties and many other physical crude deliveries would be significantly above $150 a barrel.

Prices for refined products in Europe were close to historic highs on Tuesday. European jet fuel prices stood at around $226.40 a barrel, close to the record set in mid-March, according to LSEG data. Diesel prices remained below their 2022 records, reaching $203.59 a barrel on Tuesday.