Oil Traders Buying Back Into Market’s Bullish Summer Outlook

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Signs of oil market strength are creeping back as traders gear up for an expected rebound in consumption over the summer and supplies shrink in the North Sea.

Some of the market’s more esoteric gauges have surged in recent days, buoyed in part by a barrage of strong consumption data in the U.S. as well as some of the heaviest maintenance in years at fields pumping benchmark North Sea supplies. There’s also been a supply outage in Libya.

Brent futures are trading at their biggest premium to the next month since early March -- a bullish structure known as backwardation that indicates tight physical supply. Meanwhile swaps tied to the North Sea market that prices more than two-thirds of the world’s crude have also jumped.

Oil Traders Buying Back Into Market’s Bullish Summer Outlook

It’s the first meaningful sign of recovery since market bullishness evaporated last month. That weakness came as refiners ate their way through a deluge of oil that had been stored up when prices collapsed last year, but there are now signs that much of that supply has been worked off.

“A glimmer of strength is coming back,” said Kitt Haines, an analyst at consultant Energy Aspects in London. “U.S. demand looks pretty good at the moment and that momentum should be picked up by Asia” as that region’s oil refineries exit a period of heavy of refinery maintenance.

For now, the U.S. has become the juggernaut of the oil market. Driving on U.S. interstates was higher than 2019 levels in the week through April 11 for the first time since the pandemic began. American refiners processed the most crude in almost 13 months last week, while manufacturing gauges continue to boom.

With vehicle use in the U.K. also now climbing higher, optimism is growing that vaccination programs will help oil demand surge over the summer. But even with a more positive outlook, the record spread of Covid-19 in countries like India serves as a reminder that the path of recovery is unlikely to be smooth.

For now, though, refiners are slowly emerging from seasonal maintenance work across the world, bringing back millions of barrels of demand for physical crude cargoes.

With buyers returning, weekly swaps in the North Sea market are pointing to tighter supplies in the coming weeks. So-called contracts for difference are in a backwardation of 62 cents a barrel over the nearest six weeks, compared with 23 cents a month ago, according to data from brokerage PVM Oil Associates. Dated-to-frontline swaps, key derivatives tied to the North Sea market, have surged to a premium for the first time since early March.

Oil Traders Buying Back Into Market’s Bullish Summer Outlook

The strength is in part because supply is about to take a heavy hit. The key Forties stream of North Sea crude will slow to a trickle in June as major work is undertaken on the pipeline that the oil flows along. Loadings of crude oil in April and May were already set to be low due to work on other fields.

More recently too, a budgetary dispute in Libya has curbed the nation’s production below 1 million barrels a day, aiding the latest leg higher in the oil market. Many of the nation’s main grades are light and sweet, making them similar to the crudes pumped from the North Sea.

“Brent spreads started to strengthen yesterday when the Libyan news came out,” said Tamas Varga, an analyst at PVM Oil Associates Ltd. “Further support comes from the low May program and maintenance in June,” in the North Sea, “together with the perceived jump in demand growth in the second half.”

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