Physical oil prices fall on worries over Russian supply

HOUSTON LONDON Physical oil prices have begun to sag alongside futures, reflecting less alarm over Russian-led supply disruptions and heightened concerns about a possible global economic slowdown.

The market is very bearish at this moment. A Singapore-based trader said that no one is in a hurry to buy.

The U.S. gasoline demand during the peak summer driving season and contracting factory activity in China indicate that high prices cut consumption in the world's top oil consumers, analysts and traders said. Physical market activity suggested that buyers were worried about securing supplies, which is a stark contrast from last month.

The market for prompt oil supplies has slowed, traders told Reuters, with offers slumping for West African, North Sea, Mediterranean and Middle East crudes.

In the spring, prices went up due to fears that Russia's invasion of Ukraine and Western sanctions would take millions of barrels off the market. Russian crude shipments are slightly above the levels seen before the February invasion, and that hasn't happened.

One physical crude trader said the market is coming off hard.

In West Africa, crude prices have dropped since hitting all-time highs in July. European buying eased and refining margins dipped, as offers for light, sweet Nigerian oil fell by $1.50 a barrel and comparable Ghanaian crude fell by up to $5 a barrel.

Spot premiums for Oman crude hit their lowest level in more than a month, and Dubai is at its lowest since late May. North Sea Forties also plummeted depths last seen in nearly three months while Azeri BTC crude oil hit levels not seen since the end of last year.

Chinese state refiners and South Korean refiners may buy as prices become attractive, but weak margins on lower demand has reduced their purchasing power.

Spot premiums for U.S. grades have halved in Asia, with WTI Midland trading around $7 -- $8 per barrel over Dubai. Cheaper U.S. grades are pushing locally preferred crudes with Murban trading about $7.80 above Dubai quotes compared to $12 above last month.

There are still some scattered indications of strong demand. There is a lot of demand for discounted Russian oil in Asian markets because of the robust refining margins for distillates worldwide.

Russian exports were more than 400,000 barrels per day as of August 9th, more than before its Feb. 24 invasion of Ukraine, according to J.P. Morgan data.

Russian supplies are going to stay around for at least the near future, and the idea of a price super-cycle is now very unlikely, said a second physical crude trader.

Crude futures hit $140 in March but have fallen well below $100 a barrel with U.S. futures around $92 and Brent around $97.

The U.S. gasoline demand is about 5 per cent less than the four-week average since the summer driving season began, according to data from the U.S. Energy Information Administration EIA Backwardation, the premium at which futures are traded in later months. Brent and U.S. oil has dropped from record highs in March to its narrowest since April. That means that prompt supply is less tight.

The crude six-month spread has narrowed to $5.27 a barrel, its lowest since April.

Robert Yawger, the director of energy futures at Mizuho Securities, said the super-backwardation is disappearing before our eyes.

Clay Seigle, the director of global oil at Rapidan Energy Group, said traders who use spread-trading strategies have been selling spreads and flattening the forward price curve.

Since backwardation began, two things have changed: fears that Russian oil would disappear quickly, and confidence in the strength of the global economy has slumped, Seigle said.

Storage has been built at the main U.S. crude oil hub for six straight weeks after touching multi-year lows last month.