Physical Oil Market Tightness Dissipates As Global Refineries Enter Fall Maintenance

Oil prices took a beating last week and the physical oil market has also shown signs of weakness. Using our traditional favorite metric, the Brent 1-2 timespread, you can see that despite the rally today, the timespread is falling.

One of the reasons for the tightness we saw into expiration last month was because of the Libya blockade, but now that has been resolved, Brent timespreads are coming under pressure.

In addition, the EU announced two weeks ago that 3rd party trading houses are legally allowed to trade with Russia in fear of additional price spikes. This has also lowered the Russian crude discounts relative to Brent and physical oil traders are adjusting accordingly.

So not only are the physical timespreads for crude falling, but we are also seeing refining margins come under further pressure.

But the fall in refining margins was somewhat expected given the recent disappointment in demand, however, the fall in crude timespreads was not. 

One additional explanation for the weakness in timespread has to do with the incoming refinery maintenance schedule.