Oil’s 60% crash tip of the iceberg

As oil crashes due to the impact of the coronavirus, it’s easy to overlook an even more dismal reality for producers: The real prices they’re getting for their barrels are worse still.

Having collapsed by about 60 per cent this year, Brent and West Texas Intermediate crude have stabilised at around $25 a barrel, but the price rout is far deeper for actual cargoes, which are changing hands at large and widening discounts to the global benchmarks.

The discounts mean that in the physical market, some crude streams are trading at $15,

$10 and even as little as $8 a barrel.

“The physical market is in pain, and there is more pain to come,” said Torbjorn Tornqvist, the cofounder of Gunvor Group, a large trading house. “We will see the full weight of the oversupply in a couple of weeks.”

Crude oil in the physical market trades at a premium or discount to Brent, West Texas Intermediate and other benchmarks. At times of surplus, premiums narrow and discounts widen. But the current situation is almost unprecedented, with discounts in some cases at multidecade highs.

Examples abound from Africa to West Asia to Latin America. Nigeria, the biggest oil producer in Africa, is selling its flagship Qua Iboe crude at a discount of $3.10 a barrel below the Dated Brent benchmark, the largest in at least two decades. Colombia is selling its Vasconia crude at a discount $7.75 a barrel to Brent, a 4 1/2-year low. “The physical oil market looks horrific,” said Kit Haines, an analyst at consultant Energy Aspects.

Oil prices in the physical market are weakening as the economic impact of the coronavirus on oil demand cascades through every part of the petroleum industry. Consumption is down by as much as 20 million barrels a day, Vitol Group said on Wednesday.

“Demand clearly is off, in some parts of the world, very dramatically,” Chevron CEO Mike Wirth told Bloomberg TV on Tuesday.

With fuel consumption in some countries, including France and Italy, down by a third or more, refiners are being forced to reduce the amount of crude they process. For example, Phillips 66, the world’s 11th-largest oil refiner by capacity, said on Tuesday it was operating its plants at “minimum crude processing rates” — traditionally seen in the industry as running a refinery at between 60 per cent and 80 per cent of nameplate capacity. With refiners cutting runs, their demand for barrels has fallen commensurately.