October 17, 2018 / 1:00 PM / in 8 months

COLUMN-Physical crude market seems more relaxed than paper over Saudi tensions: Russell

(Repeats item issued earlier.The opinions expressed here are those of the author, a columnist for Reuters.)

* GRAPHIC: DME Oman futures vs. Dubai swaps: tmsnrt.rs/2J1D2EF

By Clyde Russell

LAUNCESTON, Australia, Oct 17 (Reuters) - The crude oil price appears firmly in the hands of geopolitical concerns, with veiled Saudi threats over the disappearance of a journalist and the ramping up of U.S. sanctions against Iran getting most of the attention.

However, it’s always worth looking at what is happening in the real world of physical oil flows and pricing, as this can often tell a somewhat different narrative to what is driving the paper market.

The disappearance, and presumed murder, of Saudi Arabian journalist Jamal Khashoggi at the Kingdom’s consulate in Istanbul and the ongoing fallout from the incident has raised fears of Riyadh using crude oil exports as some sort of weapon.

The concern is that Saudi Arabia, which has so far denied having anything to do with the disappearance of Khashoggi, will restrict its oil exports if other nations take action against the kingdom in punishment for what is currently widely viewed as a likely state-sanctioned killing.

The debate over this possibility is certain to get the market’s attention, as are the swings and roundabouts connected with the story, such as the apparent soft-pedalling of the possible murder by U.S. President Donald Trump.

Add to the latest Saudi intrigue the November re-imposition of supposedly total sanctions against Iran’s exports by the Trump administration, and it’s easy to see why many market participants have geopolitical concerns front and centre.

However, the physical side of the crude oil market tells a more relaxed story, with some signs that the loss of Iranian barrels is so far being adequately compensated.

The latest vessel-tracking and port data compiled by Refinitiv showed that exports from the Middle East reached a three-month high of 133.08 million barrels in the week to Oct. 14.

This was up 9.94 million barrels from the prior week and was led by strong gains by Kuwait, the United Arab Emirates and Oman.

Exports from Saudi Arabia and Iraq were down slightly last week compared to the prior week, but higher than in the preceding two weeks.


Monitoring exports from Iran is becoming increasingly challenging given the Islamic Republic’s tankers are turning off their tracking transponders, presumably in a bid to thwart efforts to see where their cargoes are headed.

Given the caveats now surrounding Iranian exports, it still appears that they are flowing, with Refinitiv data showing shipments of 10.07 million barrels last week, up 1.48 million from the previous week.

Still, if exports from Iran are running at around 1.4 million barrels per day (bpd), this is still well below their potential of closer to 2.2 million bpd.

But for now it does seem the market for Middle Eastern crude is relatively well-supplied, and the pricing backs this view.

Oman crude futures for December on the Dubai Mercantile Exchange closed at $79.42 a barrel on Tuesday, putting them at a premium of 51 cents to Dubai swaps for December .

This premium has emerged in recent days as the imbroglio over the fate of Khashoggi has escalated, given that on Oct. 11 the swaps were commanding a premium of 10 cents a barrel over the futures.

While both Oman futures and physical Dubai crudes have gained in recent days, the paper oil has done so at a faster pace, suggesting investors are more concerned than the traders, refiners and producers who buy and sell actual cargoes.

Currently there isn’t a large disconnect between the paper and physical crude markets in the Middle East, but futures trading at a premium to physical does suggest the market may not be as tight as feared.

Editing by Richard Pullin

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