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Europe’s oil refineries are stepping up crude purchases following a surge in the price of diesel and disruptions to imported shipments from the Middle East. The situation is driving up the cost of physical barrels of oil.
Two key West African grades, Forcados and Egina, were recently offered at premiums of more than $5 and $7 a barrel over the international benchmark Dated Brent. A month ago they were at about $4 and $6 above the same marker.
Traders said the two grades have benefited from being rich in diesel and the fact that oil tankers coming to the continent from the Middle East are being delayed by attacks by Houthi militants on ships in the Red Sea. The turmoil has caused European refiners to buy crude from sources closer to home.
“The physical market’s awakening to the fact that the Red Sea disruptions are indeed disrupting physical flows and Europe needs more than it has right now,” said Viktor Katona, lead crude analyst at Kpler.
Europe is relatively short diesel, in part because of supply interruptions in the Middle East, meaning refiners are keen to process more of the fuel with favorable crudes in order to maximize profits. The premium the region’s processors can fetch for making diesel touched a fresh four-month high of $32.88 a barrel on Friday, according to Bloomberg fair-value data.
TotalEnergies SE has been seeking WTI Midland, bidding for it almost daily since the start of the month in a key pricing window for North Sea oil trading. Prices for the US grade against the benchmark have risen by about 50 cents a barrel during the period.
Separately, the North Sea Forties grade has been supported by increased buying for the UK’s Grangemouth refinery, while a pipeline leak at the Finnart oil terminal limits imports for the plant.
The strong buying is contributing to steeper backwardation in futures of global oil benchmark Brent, according to traders. The pricing condition, which suggests strong demand, occurs when near-term contracts are more expensive than those for delivery at a later date.
It’s not clear how long the recent strength will last, as upcoming refinery maintenance season could dampen purchases.
Crude pricing is “pointing to a tight physical market right now,” said James Davis, director of short-term oil market research at FGE. That’s “somewhat surprising given we should be seeing length in crude markets in February and March” ahead of refinery works.
