Analysis-Spot Crude Surges While Futures Slip; Rate Hikes Spook Speculators

Prices for spot crude in much of the world are rising on strong demand and a supply crunch, but in the oil futures market, worries of a recession have kept a lid on values.

Oil futures could be oversold and ripe for a reversal if global demand keeps running at the current rate of about 100 million barrels per day, closing in on pre-pandemic levels.

China has eased pandemic lockdowns in Beijing and Shanghai, which analysts said will further support demand and boost fuel prices as summer travel heats up in the northern hemisphere.

The physical markets have been further tightened by supply shortages due to sanctions on Russian oil, little spare capacity among big producers and worries of new outages in Libya.

Still, futures market investors and traders have pared their risk appetite, worried that U.S. interest rate hikes from the Federal Reserve could slow the economy.

"You have these physical markets which are tied to realities on the ground, real supply/demand factors, but there is so much uncertainty on both sides of supply and demand that the financial markets always want to be a step ahead," said John Auers, executive vice president of consultancy Turner, Mason & Co.

Brent crude futures have declined about 8% since mid-June when the Fed and European central banks raised interest rates. U.S. crude futures fell 10%.

Conversely in physical markets, offers for medium sweet Forcados Blend and light sweet Qua Iboe from Nigeria, and North Sea grades Oseberg and Ekofisk last week were all at record highs.

In the United States, WTI-Midland and WTI at East Houston traded at a more than $3 premium to U.S. Crude futures, to touch their highest in more than 2 years.

Prices for physical crude do not always trade in tandem with oil futures. But a substantial divergence in differentials can point to speculators out of sync with fundamentals.

In a sign of tight supply, U.S. crude stockpiles fell to 930.3 million barrels in the week to June 10, lowest since 2004, even as U.S. President Joe Biden's administration releases more than a million barrels per day from emergency oil reserves.

Light sweet crudes, like WTI Midland, are getting "bid to the moon" by European buyers, partly on worries of a lack of Libyan barrels, one trader said.

Some production and export facilities in Libya were shut down earlier this month amid political dispute over the control of government.

U.S. crude exports to Europe climbed in March and April as buyers snapped up the country's light sweet grades to replace Russian oil.

Open interest in WTI futures on the New York Mercantile Exchange fell on June 16 to the lowest level since May 2016 as traders sought to cut risk, worried that higher interest rates could trigger a recession and slash oil demand.

Open interest denotes the number of active contracts, and this figure falls when traders close more positions than are opened in a day. Lower liquidity typically results in a more volatile market with drastic price swings.

"Supply and demand fundamentals have not been altered, but the financial assets aspect of it is a sentiment shift," senior crude trader at CIBC Wealth, Rebecca Babin, said.

"Typically, the supply and demand fundamentals will mean things will revert back over the medium term, but you can experience a lot of volatility from the financial asset market in the meantime," she added.