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Oil prices rise on Suez Canal blockage and European purchases, but lockdowns take toll

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Oilfield Technology,

Oil prices rose on Wednesday due to a blockage at the Suez Canal, which prevents normal traffic of oil tankers. Positive data in European purchasing manager indices also help, but concerns that heavy lockdowns in Europe will affect the demand recovery still keep prices lower than few weeks ago.

Rystad Energy’s Head of Oil Markets, Bjornar Tonhaugen, has commented on the price rises:

"Just when bullish traders thought that the price party was over, they got an unexpected gift, as the Suez Canal blockage is temporarily disrupting usual tanker traffic and the respective expected oil and LNG deliveries.

The grounded ship, due to its massive size, is creating some distortion in the flows of crude and products that are transported through the canal and such ‘speed-bumps’ are having a rollover effect on oil prices, as the product will not reach its buyers as quickly as expected.

The effect is likely to be small and transient, as there are alternative sources and shipping routes for crude and products, but if the blockage lasts for more than a few days, it could impact prices.

Optimistic reports suggest that the blockage could be over on Thursday, instead of initial estimates for extended delays. Price levels will depend on how long it will take to resolve the incident. Thus the price effect is likely to be short-lived.

However, as demand is currently soft amid the refinery maintenance season and concerns about extended lockdowns, the timing of the blockage is not the most critical, allowing a temporary hiccup in oil flows without a very heavy effect on prices.

If the Suez blockage happened with demand fully recovered, the effect would have been much stronger.

Prices are also higher this morning as bargain hunters also priced in positive surprises in the European purchasing manager indices this morning.

However, the correction in prices which accelerated during the last days was long overdue and was spurred by concerns about the near term outlook for European oil demand, concerns that are still valid.

The “paper market” has suddenly realized it had gotten a little ahead of itself, having been pricing in ever tighter crude market fundamentals in the coming months.

Triggered by the AstraZeneca vaccine uncertainty last week, a correction started to accelerate in the futures curve time spreads for Brent, WTI and Dubai.

The prompt ICE Brent time spread (May-June) even reverted to contango for the first time since 15 Jan.

The read-across is that the paper market is getting less certain about a tight crude market in the second quarter of the year, and is now “pricing in” less aggressive stock draws than during the height of the bullish sentiment cycle at the start of March.

Physical crude differentials, on the other hand, have been reflecting soft demand for a while, especially versus Dated (Brent), conflicting with the bullish sentiment that had been reflected in the Brent futures curve for a while.

“Swing barrels” such as West African grades have struggled to clear at prevailing prices and price differentials have weakened to narrower premiums/wider discounts to the North Sea benchmark depending on the grade.

The Russian flagship Urals differentials have also weakened to large discounts to Dated, and Saudi Aramco’s OSPs for April was cut hugely to Europe reflect the flailing state of demand in the region.

Aramco did raise OSPs to Asia marginally, but time will show if this move was premature and the Chinese have been taking additional Iranian cargoes recently amid the voluntary KSA cuts.

Meanwhile, the extended lockdowns in Europe are not going away very soon and as Easter season is ahead of us, there is extra concern that infection rates may rise further.

If lockdowns continue for long, it is almost certain that oil demand will not recover as quickly as though in the beginning of the year.

Lower-than-expected oil demand of course means that oil prices will take a hit and that is what traders have been pricing in recently.

If prices will regain the levels they enjoyed in the beginning of the month will essentially depend on how quickly lockdowns conclude and how smooth the vaccination campaigns are, as hiccups can’t do else but slow prices down.

The latest price developments send clear signals to OPEC+ that the market is still fragile, so there is a lot of trader interest for the group’s coming policy decision in the beginning of April."

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