Brent futures are understating physical market stress, analysts at BMI, a unit of Fitch Solutions, said in a BMI report sent to Rigzone by the Fitch Group early Friday.
“Recent price action in Brent futures continues to reflect tension between physical tightness and shifting geopolitical expectations,” the BMI analysts said in the report, noting that front-month Brent rallied sharply in early May before retracing to around $98 per barrel recently.
“This volatility reinforces our view that futures prices are struggling to provide a stable signal of underlying market conditions,” they added.
In the report, the BMI analysts highlighted that the oil market has been witnessing “notable volatility” in the spread between Dated Brent and front-month Brent contracts.
“Dated Brent, representing physical barrels for prompt delivery, often trades at a premium to the front-month futures due to immediate demand, logistical constraints, or supply disruptions,” they pointed out.
“This premium is typically viewed as an indicator of market tightness, suggesting robust demand for physical crude relative to paper contracts,” they added.
“We believe the Dated Brent contract is more reflective of the conditions facing oil markets as the scramble for crude for refining becomes more precarious for buyers,” they continued.
The analysts noted in the report that, recently, the spread between Dated Brent and the front-month contract has widened substantially, “reflecting emerging shortages in physical supply”.
“Demand for immediate crude delivery has helped push Dated Brent prices to well above $130 per barrel, while other Middle Eastern grades also achieved prices above $135 per barrel, reflecting the shortage of available crude for refining and being more indicative of the energy shock markets are facing,” they added.
The BMI analysts said the recent widening highlights the severe stress crude buyers are facing.
“Additionally, elevated shipping rates, insurance and fuel costs are adding to cost pressures for refiners (the main buyers of crude), some of whom are facing refining margins that do not support production runs,” they added.
“This is leading refiners to reduce output, raising fuel costs further as more supply is lost and stocks are drawn down further,” they warned.
“The use of the Dated Brent contract for gauging the impacts of elevated crude prices better reflects the stress markets are facing,” they went on to state, noting that they currently forecast that May will continue to see elevated prices for the contract before declining in subsequent months, “following a clear peace agreement and a move towards normalization of vessel traffic through the Persian Gulf”.
“The physical market for crude should remain buoyant longer than paper due to refiners’ immediate need to increase refining runs and rebuild stocks,” the analysts highlighted.
Opposite Forces
In a market analysis sent to Rigzone on Friday, Naeem Aslam, CIO at Zaye Capital Markets, noted that oil has been moving sharply in both directions “because traders are dealing with two opposite forces at the same time: peace headlines that reduce panic buying, and military threats that keep the war premium alive”.
The Strait of Hormuz remains the most important pressure point for crude, according to Aslam.
“At Zaye Capital Markets, we see the oil ecosystem being driven by geopolitics first, then macro data second, because any disruption around Hormuz affects shipping, refining, fuel prices, airline costs, freight rates, and inflation expectations,” he said.
“The IEA has warned that energy markets are in ‘troubled waters’, with Brent swinging between roughly $96 and $102 as the Iran war and Strait uncertainty keep price volatility high,” he added.
Aslam went on to note in the analysis that yesterday’s economic data “added another layer to oil sentiment because the labor market still looked resilient rather than weak”.
“Initial jobless claims came in at 200,000 for the week ending May 2, below the 205,000 forecast but above the prior 190,000 reading. Continuing claims came in at 1.766 million, below the 1.800 million expected,” he highlighted.
“That combination tells the market that the economy is cooling slightly, but not enough to suggest fuel demand is collapsing. For oil, this is supportive because steady employment can protect driving demand, travel demand, delivery activity, and broader energy consumption,” he continued.
“However, it also keeps the Federal Reserve cautious because a solid labor market can delay rate cuts, which may later weigh on growth-sensitive crude demand,” he warned.
Aslam went on to note that today’s economic data will decide whether oil strength is treated as demand-backed or inflation-risk driven.
“If Average Hourly Earnings, Non-Farm Employment Change, the Unemployment Rate, Consumer Sentiment, and Inflation Expectations come in stronger than forecast, oil may initially gain because stronger jobs and wages support fuel consumption,” he said.
“But the longer-term reaction could become mixed if strong data keeps interest rates high and hurts future demand,” he warned.
“If the data comes in weaker than forecast, crude may fall on demand fears, unless traders believe weaker growth will force rate cuts and support risk assets,” he said.
In a Skandinaviska Enskilda Banken AB (SEB) report sent to Rigzone on Thursday, SEB Commodities Analyst Ole R. Hvalbye highlighted that Wednesday’s trading session was “violent” for oil.
“Brent printed a high of $108.8 per barrel in the morning, collapsed to an intraday low of $96.8 per barrel in the afternoon, then clawed back about half the move into the close,” he pointed out.
In this report, Hvalbye projected that a confirmed U.S.-Iran deal “probably takes Brent back into the $80-90s quickly” while “a breakdown in talks or a Trump pivot back to strikes lands us immediately north of $120 per barrel”.
Hvalbye went on to reveal in the report that SEB is keeping risks “skewed to the upside”, adding that “another month of closure theoretically puts rest of year Brent toward $120 per barrel”.
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