COLUMN-Falling Brent premiums point to plentiful oil: Kemp

Thu Apr 12, 2012 9:59am EDT

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By John Kemp

LONDON, April 12 (Reuters) - Premiums for nearby Brent futures contracts have fallen sharply since the start of the week in a sign the market is no longer worried about serious supply shortfalls over the summer.

The premium for Brent delivered in May rather than June has fallen from 60 cents per barrel on April 5 to just over 10 cents in recent trading. It is the lowest premium since late January.

Premiums for June, July, August and September deliveries have also shrunk sharply in the last four trading sessions ().

Timespreads are regarded by most market analysts as a good proxy for tightness in physical supply. The collapse in the spreads coincides with a host of other indications that the physical market is not as tight as analysts and investors feared until recently.

In its latest monthly "Oil Market Report", published earlier on Thursday, the International Energy Agency acknowledged that "the cycle of repeatedly tightening fundamentals evident since 2009 has been broken for now", ending a tightening trend visible over the previous 10 quarters.

The report cited sluggish oil demand and rising production by Saudi Arabia as responsible for a potential build in global oil stocks of as much as 1 million barrels per day in the first three months of the year. Much of the oil has been absorbed into strategic inventories in China and Saudi Arabia. Nonetheless, it has eased fears about near-term disruptions.

Tensions between Iran and the five permanent members of the Security Council plus Germany (P5+1) also appear to be easing somewhat as both sides hint at flexibility ahead of negotiations on Iran's nuclear enrichment programme in Istanbul this weekend.

The P5+1 will not lay out demands when talks open but will be looking for signs that Iran is ready to make concessions, one Western diplomat told Reuters reporters. Iran has promised "new initiatives"..

Israel has indicated it would accept as a first priority an end to high-level 20 percent uranium enrichment, which would be easier to enrich further to bomb-grade 90 percent purity, leaving the thornier issues to one side for the moment .

The market has also become convinced that policymakers are likely to order the release of strategic crude and product reserves within the next couple of months if prices continue rising or there is any prospect of a supply shortfall.

Spot crude prices have been trending gently downwards for more than a month.

Spreads between various crude grades have also pointed to a well supplied market. Price differentials for physical grades have backed up claims by Saudi Oil Minister Ali al-Naimi that the market is awash with crude, as my colleague Ikuko Kurahone pointed out last week.

Brent timespreads were one of the last signs of tightness. Now they are falling into line with other indications of a softer market.

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