Panic Has Set In On The Global Oil Market

Traders around the world are looking for barrels, and shortages are already hitting refining.

The oil market has seen a fierce battle for spare barrels amid a fragile truce in the Middle East. Traders and refiners around the world are looking for cargoes with immediate delivery.

The Bloomberg writes that traders say panicked decisions in the world's key physical oil markets show the extent of the shortage, which will be felt more and more as supplies from the Middle East dwindle. They said the soaring prices signaled that some European refineries may have to cut production, a move that could help balance the crude market but would exacerbate shortages of diesel and jet fuel.

"There is simply not enough oil. The market for physical Brent crude is in chaos and prices have already risen too much. At this rate, even European refineries will have to reduce utilization, possibly as early as next month," said Sparta Commodities AS' head of research Neil Crosby.

The rush in the physical oil market contrasts with the situation in the futures market, where prices for crude with delivery in June fell 13% last week to close at around $95 a barrel amid optimism over the truce.

"The last cargoes that passed through the Strait of Hormuz before the conflict started are now arriving at their destinations. This is where markets trading on paper collide with reality and the 40-day gap in global energy flows becomes apparent," said Abu Dhabi National Oil Co CEO Sultan al-Jaber.

This gap can be seen in the premium refineries are willing to pay to ensure they have oil available in the near term. Traders at some Asian refineries, who wished to remain anonymous, said they are no longer focused on price, but are simply looking to secure barrels wherever they can to guarantee energy security.

Asian countries most dependent on oil passing through the Strait of Hormuz are looking for oil from around the world. Japanese refiners, for example, have led the race to buy up oil from the United States, with exports reaching record levels. Active buying by Chinese refiners has driven Vancouver oil shipments to record levels this month. And Indian refiners are ramping up purchases from Venezuela.

Traders and analysts say the extreme level of premiums for oil ready for immediate delivery is putting a huge strain on the market. Smaller refineries face sharply increased financing needs due to higher prices, as well as a hedging problem in a market where physical crude is much more expensive than the most liquid derivatives tied to it.

As a result, some refiners are beginning to exit the market, which will reduce their output and further squeeze markets for refined products.

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