Recently the days of $147/b oil have seemed like a long-distant memory, even though they were only few weeks ago. Back in early July, Brent and WTI futures were riding high and traders spoke of an insatiable desire to buy as institutional investors piled in on crude. But some warned that fundamentals were disconnected from prices to an extent not witnessed before.
It now looks like those cautious few might have been right.
The rebound in the dollar's fortunes and a general awakening to the fact the US and Europe really are facing a genuine recession, with lower energy demands, have led to a large fall in futures.
As investors bail out of an overheated market it can take people by surprise, especially when the market has built itself up to a point where it's got a long way to fall.
After the big drop in futures prices over the last couple of weeks, prices of North Sea crude oil have been falling too, this time at a rate never seen before.
The North Sea is the location of Dated Brent, the European marker and benchmark for nearly two-thirds of the world's oil. Its light sweet crude grades are traditionally much sought-after by buyers all over Europe and the US Gulf and traditionally see healthy premiums.
Ekofisk, a typical, nicely fungible North Sea grade was assessed at Dated Brent minus $0.10/b in Platts assessments for August 27, the lowest level since May last year. Five weeks ago the grade hit Dated Brent plus $3.65/b, an all-time high.
But after enjoying months of plenty, long physical players are seeing leaner times as many factors contrive to push prices lower. A major slate of refinery maintenance, low US import demand, and high import levels from West Africa and the Mediterranean have forced prices of many North Sea grades down from the record highs seen in early July.
Some players have found themselves very long indeed. StatoilHydro, the owner of Mongstad and many cargoes of Norwegian crude that feed it, have been offering their cargoes more and more aggressively in recent days, as Statfjord crude has fallen from its record high of Dated Brent plus $4.50/b on July 1 to plus $1.15 in the most recent assessment.
While Ekofisk seems to have found a bit of a floor, other light sweet grades are still falling in the North Sea and some say they've got more to go.
Arbitrage to the US would be an option for some if the US Gulf was really interested in buying but, while the arb's open on paper, the physical appetite is not, while spare refining capacity sits idle and the threat of hurricane season lingers.
In the end, of course, prices will get to a point where storage will fill up and refiners enjoy more low prices for a while. Just as the producers have enjoyed seeing record highs on the crude they put into the market.
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