Oil's bull run hides a deep disconnect, crude traders warn

Wed May 6, 2015 12:35pm EDT
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By Dmitry Zhdannikov, Ron Bousso and Libby George

LONDON (Reuters) - While oil futures prices rebound with vigor as analysts cite strong demand, the physical crude market tells a much more cautionary tale.

Tens of millions of barrels are struggling to find buyers in Europe with traders of West African, Azeri and North Sea crude blaming poor demand.

The deep disconnect between the oil futures and physical markets looks similar to the events of June 2014 when the physical market weakness became a precursor for a futures price crash.

"Being large physical buyers of crude we have a direct pulse of the market and feel immediately when it is well supplied, as is happening now," Dario Scaffardi, executive vice resident and general manager of independent Italian refiner Saras, told Reuters.

"In the short-term, futures prices do not necessarily reflect accurately the physical market."

Benchmark Brent oil futures prices more than halved between June 2014 and January 2015 after OPEC refused to cut output and instead chose to undercut more expensive producers, including a booming U.S. shale oil sector.

But since January's lows of $46 per barrel, prices have risen back to $69 per barrel on Wednesday on fears the output in the United States would fall deeper than expected and on signs of a faster-than-expected demand rise across the world.

However, data from OPEC and the International Energy Agency show the world is still pumping 1.5 million barrels per day more crude than it consumes. Traders say they are seeing increased evidence of crude barrels struggling to find a home.   Continued...

Oil pump jacks are seen next to a strawberry field in Oxnard, California February 24, 2015. REUTERS/Lucy Nicholson