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Tight Physical Crude Market Points To Higher Oil Prices – OilPrice.com

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Tight Physical Crude Market Points To Higher Oil Prices | OilPrice.com


Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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  • A tight physical supply in crude markets could send oil prices even higher.
  • Demand has proven to be more resilient to the effects of Omicron than many analysts had originally thought.
  • With both the physical and futures markets rallying, and increased geopolitical premium, market observers are looking towards the $100 mark for oil prices.

Physical Crude

Prices of physical crude cargoes have rallied this year, signaling resilient global oil demand even in the face of record-high COVID cases in the Omicron wave. Crude grades from the United States, Africa, the North Sea, the Middle East, and Russia have seen a significant increase in their prices in recent weeks, suggesting that the physical demand for oil is tight across the world. 

The tightness in the physical crude prices is reflected in the oil futures market where the backwardation—the state of the market signaling tight supply—has increased for both major benchmarks, Brent and WTI. 

The tight physical supply of oil points to further gains in the futures market, where Brent Crude prices hit a fresh seven-year high at over $87.80 a barrel early on Tuesday—the highest price for Brent since October 2014. 

Part of the rally in recent days was the result of heightened geopolitical tensions in the Middle East and the Russia-West standoff over Ukraine. But the other major driver was the tight supply on the market, with physical cargo prices rallying, outages in major producing countries, and demand resilient to the Omicron wave. Traders and refiners seem to believe that the feared threat to demand from the new variant was overblown, and are now back to the market buying cargoes much more than they did at the end of November and early December when the impact of Omicron was still a very large looming threat. 

Strong Physical Oil Demand  

Since the start of the year, prices of crude cargoes that will end up in two or three months in the world’s largest importing region, Asia, have rallied strongly, as refiners are back on the market following some hesitancy at the end of 2021 amid the unknown effects of Omicron on demand. Consumption is resilient, disproving fears of a new dip, and holding up stronger than many analysts and forecasters, including the International Energy Agency, had predicted. 

Global oil demand has proven to be more resilient to the effects of the Omicron variant’s spread than the IEA expected, Executive Director Fatih Birol said last week. 

“Demand dynamics are stronger than many of the market observers had thought, mainly due to the milder Omicron expectations,” Birol said, as quoted by Bloomberg.

As a result of this resilient demand, refiners are buying cargoes, which raises the prices of physical crude from every part of the world. 

“These are crazy numbers. There clearly is physical tightness,” an oil trader in the North Sea region told Reuters this weekend.

The premiums for the Forties and Ekofisk grades from the North Sea are at their highest in two years. The prices of crude grades from West Africa have also jumped amid low Libyan supply in recent weeks. The Bakken crude from North Dakota is also trading at its highest level compared to benchmarks in nearly two years, according to Bloomberg’s estimates. 

Price differentials of grades from Russia and the Middle East have also increased to the highest benchmarks in several months.  

“(Buyers) are snapping up everything no matter what grade,” an oil trader from the U.S. tells Reuters. 

“The physical crude market is way over the forward or futures contracts. It implies genuine prompt tightness,” PVM Oil Associates’ analyst Tamas Varga told Bloomberg last week.

Physical Tightness Reflected In Oil Futures Market

This week, PVM Oil Associates said in a note on Monday that “Positive developments were in focus and there is a genuine belief that physical demand will keep exceeding supply and in return this perceived bullish backdrop will further encourage investors to remain faithful to our market.” 

The tight physical market suggests the futures market has further room to rally, traders and analysts say. 

“The prompt spreads in WTI and Brent remain elevated at 63 and 74 cents per barrel, thereby signaling rising tightness,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Monday. 

Related: $80 Oil Is Too Enticing For U.S. Drillers To Ignore

“Speculators, a little late to the recent rally, boosted bullish oil bets in WTI and Brent bets by the most in 14 months last week,” Hansen added, noting that the combined net long—the difference between bullish and bearish bets—in Brent and WTI jumped last week by the most since November 2020 to reach 538,000 lots or 538 million barrels. This is still well below the most recent peak at 737,000 lots from last June, he said. 

$100 Oil? 

With both the physical and futures markets rallying, and increased geopolitical premium, market observers are again posing the question: how far can this rally go? 

According to the world’s largest independent oil trader, Vitol, oil prices—at a seven-year-high early on Tuesday—are justified and have further to go.

Triple-digit oil “is in the works” for the second quarter, Francisco Blanch, head of global commodities at Bank of America, told Bloomberg last week. 

Demand is recovering meaningfully, while OPEC+ supply will start leveling off within the next two months, Blanch said, noting that Russian supply will level off and it will be only Saudi Arabia and the United Arab Emirates (UAE) that can produce incremental barrels to add to the market. 

Of course, risks to the downside haven’t gone away. The biggest unknown and the largest potential headwind to near-term global demand is China, and whether it would continue to apply its zero-COVID policy, BofA’s Blanch said. Large lockdowns in the world’s top oil importer could reduce consumption and potentially, Chinese oil imports. 

Refinery maintenance in the spring could also slow down the physical oil market, analysts say. 

Yet, the oil rally may not be over just yet, especially if demand continues to reflect just a “mild Omicron effect.” 

By Tsvetana Paraskova for Oilprice.com

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Bankers buck gloomy trend by forecasting growth amid concerns about economic slowdown – The Globe and Mail

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Bank of Montreal reported a modest increase in second-quarter profit on Wednesday.Nathan Denette/The Canadian Press

Top executives at two major Canadian banks predict they can keep adding new loans and increasing profits in the coming quarters, offering an optimistic outlook for the financial sector that is at odds with economists’ increasingly gloomy forecasts of a downturn ahead.

Bank of Nova Scotia BNS-T and Bank of Montreal BMO-T both reported higher second-quarter profits on Wednesday, underpinned by robust demand for personal and commercial loans as well as lower loan loss reserves than analysts anticipated. Profits increased 12 per cent compared with those in the same quarter a year earlier at Scotiabank, and 4 per cent after adjustments at BMO, as rising interest rates helped increase margins on loans.

Growth slowdown fears temper bullishness on commodity currencies

Canada considers new measures to protect economy from national security threats

That marked a strong start to the major banks’ earnings season, but analysts cautioned those results, which cover the three months ended April 30, already look distant in the rear-view mirror. They pressed senior executives about how the banks are bracing for a deteriorating economic environment marked by war in Ukraine, high inflation, rapid central bank rate hikes and the increasing prospect of a recession that could curb customers’ appetite to borrow.

Bank chief executives and finance chiefs stressed they still expect economies to grow as COVID-19-related headwinds ease. They noted that most households are in good financial health, as many stashed away extra savings during the pandemic, while unemployment remains low in a tight labour market. Businesses are borrowing to bulk up inventories as demand for products outstrips supply, and some sectors, such as commodities, are booming.

“The macroeconomic backdrop for our key geographies remains positive,” said Scotiabank chief executive Brian Porter, on a conference call with analysts on Wednesday. “Despite the macroeconomic and geopolitical uncertainties in recent months, we are encouraged by the resilience of our businesses.”

The mood among economists is much more downbeat as the threat of a global recession mounts, even though few are predicting that is highly likely. The tone has also been sombre as business leaders and policy makers rub elbows at the World Economic Forum’s gathering in Davos. And the former governor of Canada’s central bank, Stephen Poloz, recently predicted the country is heading for a period of stagflation – a mix of slow growth and high inflation.

Yet increases in banks’ loan balances have been broad-based, and BMO chief financial officer Tayfun Tuzun said in an interview that he still expects “high-single-digit loan growth” year over year – the same guidance he gave three months ago.

“All in all our clients are telling us that they’re still interested in investing in their businesses,” said Mr. Tuzun. He added that there are “a lot of good indicators for what’s to come” for the bank.

A particular bright spot is commercial lending in Canada, where loan balances rose 13 per cent at BMO and 19 per cent at Scotiabank in the second quarter. Scotiabank’s chief financial officer, Raj Viswanthan, said corporate clients and consumers have “very strong” balance sheets at the moment, “so we see a lot of pent up demand.”

Mortgage balances rose 16 per cent year over year at Scotiabank, benefitting from the tail end of a red-hot streak for housing markets.Chris Young/The Canadian Press

The disruptions caused by COVID-19 and war in Ukraine have also increased demand in key areas, Mr. Viswanathan said. “It’s supply chain issues, it’s the rise of e-commerce, it’s the demand for food.”

Bankers aren’t blind to the gathering economic storm clouds. BMO chief risk officer Pat Cronin said his bank is giving greater weight to a hypothetical scenario that predicts the impact of a severe downturn, and has lowered expectations for parts of its forecast it considers the base case.

When U.S. banking giant JPMorgan Chase & Co. hosted an investor day this week, chief executive Jamie Dimon summed up the outlook as, “strong economy, big storm clouds,” saying those clouds “may dissipate. If it was a hurricane, I would tell you that.” But he acknowledged “they may not dissipate, so we’re not wishful thinkers.”

The Bank of Canada published a paper this month that suggests the country’s banks are strong enough and well capitalized to withstand even a severe, prolonged downturn in which unemployment peaks at 13.5 per cent and house prices fall 29 per cent.

Gabriel Dechaine, an analyst at National Bank Financial Inc., wrote to clients that, “in a normal environment, such optimism would be met with positive expectations for stock price appreciation,” but he remains “more cautious … as long as the disruptive forces of inflation that heighten recession expectations persist.”

In the fiscal second quarter, Scotiabank earned $2.75-billion, or $2.16 per share, compared with $2.46-billion, or $1.88 per share, in the same quarter last year. Adjusted to exclude certain items, Scotiabank said it earned $2.18 per share, well above the consensus estimate of $1.98 per share among analysts, according to Refinitiv.

In the same quarter, BMO earned $4.76-billion, or $7.13 per share, compared with $1.3-billion, or $1.91 per share, a year earlier. After adjusting to exclude one-time items that include a $2.6-billion gain on a financial instrument tied to BMO’s US$16.3-billion acquisition of California-based Bank of the West, profit was $2.187-billion, or $3.23 per share. On average, analysts expected $3.24 per share on an adjusted basis.

Former Bank of Canada governor Stephen Poloz recently predicted the country is heading for a period of stagflation – a mix of slow growth and high inflation.Sean Kilpatrick/The Canadian Press

Both banks raised their quarterly dividends, by 3 cents per share to $1.03 at Scotiabank, and by 6 cents per share to $1.39 at BMO.

Two key factors that have supported banks’ rising profits through much of the pandemic – rapidly rising mortgage balances and unusually low losses from defaulting loans – appear to have reached peaks, and are set to return to more normal levels.

Mortgage balances rose 16 per cent year over year at Scotiabank and 8 per cent at BMO, benefitting from the tail end of a red-hot streak for housing markets. But that yearly growth rate is “slowly slowing,” said Dan Rees, Scotiabank’s head of Canadian banking, and is likely to revert to a pace in the range of 6 to 9 per cent in the coming quarters even as some economists are predicting housing prices will fall.

Provisions for credit losses – the funds banks set aside to cover losses in case loans default – “reached the floor this quarter,” said Phil Thomas, Scotiabank’s chief risk officer. He and his BMO counterpart, Mr. Cronin, expect loan loss reserves will gradually drift higher. But with write-offs and delinquencies still very low, neither risk officer is predicting a spike in loan losses, even though it will rapidly get more expensive for consumers to service their debts.

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YYJ delays: RCMP called to Victoria International Airport | CTV News – CTV News VI

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Travellers who have a flight planned at Victoria International Airport (YYJ) on Tuesday are being warned of travel disruptions due to police activity.

Sidney/North Saanich RCMP say the airport was closed after a suspicious package was discovered around 1:30 p.m.

Cpl. Andres Sanchez of the Sidney/North Saanich RCMP says that the airport was closed to all incoming and outgoing flights “out of an abundance of caution.”

He said the airport will remain closed until police “can be sure it is safe for the public to travel.”

‘INCENDIARY DEVICE’

“The package was located at the departures/check-in [area], so it was brought in by a passenger,” said Sanchez Tuesday afternoon.

The package was flagged by Canadian Air Transport Security Authority (CATSA) staff who spotted what appeared to be an “incendiary device” within a bag, he said.

“CATSA employees performed the checks that you normally do at a departure situation at the airport,” he said.

“They scanned the bag and found there were items inside that could be of a dangerous nature and at that point police were called to the scene to investigate further,” he said.

Mounties say a specialized RCMP team has been called in from the mainland to remove the bag from the premises and to “ensure the package is dealt with in a safe manner.”

PASSENGER UNDER INVESTIGATION

Sanchez says the individual who brought the bag is under investigation, but it’s unclear if any criminal charges will be recommended yet.

“Again, because we don’t know what’s in that bag we can’t speak further on that,” he said.

In the meantime, people are asked to avoid the airport for the next few hours, according to RCMP spokesperson Sgt. Chris Manseau.

Around 4:20 p.m., the airport said all scheduled commercial flights for the next two hours were cancelled.

The airport is working with airlines to keep them updated on the status of flights.

Police say they hope the airport will be able to reopen Tuesday night, but it’s uncertain how long the investigation at the property will take.

Travellers should check the YYJ website for the latest updates on their flights, according to the airport. 

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