Physical oil prices set to catch futures’ levels

The end of some of the weakest physical crude prices in years could be in sight.

While oil futures prices are at their highest since 2014 amid geopolitical risks — including renewed U.S. sanctions on Iran — physical prices in some corners of the oil market have been depressed. Russian Urals and Caspian CPC crudes have recently traded at multi-year lows, and West African crude flows to Asia have slumped to the lowest since 2015.

The weakness is on the brink of reversing as refiners ramp up purchases as they complete yearly maintenance that had cut their processing rates, according to at least five traders directly involved in the market.

“The mismatch will correct through physical markets coming up rather than futures coming down,” said Richard Mallinson, a geopolitical analyst at Energy Aspects Ltd. in London. “Global balances look constructive in the second half of the year, after refinery maintenance is over.”

In the meantime, European refiners may be set for a summer windfall with a host of cheap grades to cherry pick from as they ramp up throughput.

A flood of U.S. crude exports, lackluster demand for imports in China, a surfeit of Russian shipments and the lingering effects of refinery maintenance season across the globe have combined to curb prices for some grades in the world where barrels of oil are actually bought and sold — even amid a rising trend in futures contracts.

“Brent that is trading now is two months ahead, so it is pricing in July when refiners are back from maintenance,” Mallinson said.

The current weakness in the market for Russian grades is a reflection of U.S. crude imports coming “at the wrong time, when refinery maintenance