The Brent crude market structure and certain physical markets in Europe and Africa are experiencing tighter supply due to disruptions in the Red Sea and increased demand from China, according to traders, LSEG data, and analysts. Shipping delays caused by vessels avoiding the Red Sea, coupled with other factors such as outages and rising Chinese demand, have led to heightened competition for crude supply that doesn’t need to transit the Suez Canal. This tightening of supply is most apparent in European markets.
The Brent crude futures market reached its most bullish structure in two months on Friday, as tankers diverted from the Red Sea in the aftermath of air strikes by the United States and Britain in Yemen. The premium of the first-month Brent contract to the six-month contract rose to $2.15 a barrel, the highest since November. This backwardation structure indicates a perception of tighter supply for prompt delivery.
The disruptions in the Red Sea and Suez Canal have caused delays in the shipping of Middle Eastern crude to Europe. Data from Kpler shows that the volume of Middle Eastern crude heading to Europe nearly halved in December compared to October. Consequently, European refiners have been forced to seek alternatives locally, leading to price increases and a tight market. The North Sea crude market has also been affected, with the differential of Forties crude to benchmark dated Brent reaching its highest level since late November.
In addition to the Red Sea disruptions, other factors contributing to the tight European crude market include a drop in Libyan supply due to protests and lower Nigerian exports. The opening of Nigeria’s Dangote refinery has reduced the supply of Nigerian crude, leading to higher bids for certain grades from European refiners. The demand for Johan Sverdrup crude, an alternative to Middle East crude, has also increased, potentially due to concerns about delays in Middle East oil arrivals in Europe.
In Asia, concerns about supply disruptions have driven up the average spot premiums for Middle Eastern oil benchmarks such as Dubai, Oman, and Murban. However, U.S. crude differentials have not shown any significant impact as they have remained largely stable this year.
The tightness in the European crude market has also been influenced by increased demand for Angolan crude from China and India. Issues surrounding Iranian and Russian crude have led to higher demand for Angolan crude in these countries, reducing the supply available for Europe.
Overall, the combination of disruptions in the Red Sea, outages, rising Chinese demand, and other factors has tightened the crude market in Europe and Africa. European refiners are particularly affected, leading to increased competition for crude supply and price increases for some grades. While the full impact of the Red Sea disruptions can be challenging to measure separately, the market overall remains strong, with high demand and nervousness among traders.
