(Bloomberg) -- One of the great sources of hope for oil bulls -- the tightest market for physical crude supply in years -- is slumping fast.
The differentials that traders pay for cargoes in the North Sea, the Middle East and the U.S. tumbled in the past few weeks. In one example, a basket of grades in the Gulf of Mexico is now trading near its weakest in 10 months. As recently as February, it was at its strongest in half a decade.
“Almost all prompt physical crude assessments have softened over the last couple of weeks, coming off multi-year highs over May/June,” JBC Energy GmbH, a Vienna-based researcher, said in a note.
Crude prices in many parts of the world have traded for months in a way that suggests oil refineries are struggling to find the immediate barrels they need amid a litany of supply disruptions. While that's still the case, the premiums traders are willing to pay to obtain those prompt cargoes are now tumbling -- a sure sign that supply is now catching up with demand.
The weakness is being caused by weak demand in Asia and a recovery in supply in Europe.
With the U.S.-China trade war now almost a year old and showing no signs of ending, its impact in Asia is becoming apparent in everything from profit warnings by Japanese car makers to sagging Chinese diesel consumption. The region's big oil processors are cutting run rates as weak demand for fuel products erodes their margins.
In Europe, loadings of North Sea barrels are recovering after a period of work on oil fields that severely dented regional supplies in June. Shipments to the continent via a giant pipeline from Russia have also been restored following a contamination crisis. Cargoes from the likes of Kazakhstan and Nigeria are also picking up.
All that's having an impact on prices in the Gulf of Mexico that have become increasingly connected to the twists and turns of the global market while, at the same time, reflecting booming U.S. supply.
Differentials for a basket of crudes in the region have dropped to about $2 a barrel above West Texas Intermediate. As recently as March they were at an almost $7.50 premium. Colombia's Vasconia crude, is now at a $2.75 discount to Brent, having got as high as minus $1.35.
In the main WTI market itself, premiums for immediate barrels are tumbling too. September crude is now about 18 cents a barrel over December, from its 2019 peak of $1.23 set in April. For Brent, the same time spread has tumbled to just 73 cents, from $1.65 in May.
“We're starting to see the forward Dated Brent contracts go on the retreat,” said Greg Newman, co-CEO of Onyx Commodities, which specializes in energy derivatives. “This is first clear sign that the underlying physical market is waning.”
--With assistance from Catherine Ngai, Sharon Cho, Serene Cheong and Javier Blas.
To contact the reporters on this story: Alex Longley in London at alongley@bloomberg.net;Prejula Prem in London at pprem1@bloomberg.net
To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net, John Deane
©2019 Bloomberg L.P.
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