LONDON Europe's oil futures market and its physical crude markets paint widely devigent views on oil.
Brent oil futures have remained stubbornly high around $122 to $126 per barrel, even while Saudi Arabia's oil minister, Ali al-Naimi, has repeatedly assured the market there are ample supplies.
Price differentials for physical oil grades suggest that Naimi is right -- the market is awash with crude.
Brent futures are up sharply this year as investors use them to hedge against the chance of an escalation in Iran's dispute with the West that leads to a sharp contraction in supply.
"There is certainly a discrepancy between futures and cash crude markets," said Olivier Jakob from Petromatrix consultancy. "There is no shortage in the physical market, but there is a lot of uncertainty regarding Iran. If you want to hedge Iranian risk, you do it on the futures market."
In the physical market, differentials for Russian Urals, one of the world's most liquid physical crude grades and similar in quality to Iranian oil, have weakened to 11-month lows.
The weakening of other physical grades as well suggests that the expectation of plentiful supply may soon filter through to the futures market, potentially reducing the price of Brent, the global oil price benchmark.
"The reality today is that the market is well oversupplied. OPEC production has been rising consistently since September and will probably continue rising further," said Colin Smith, energy strategist at VTB Capital.
"At some point - as happened in 2008 - the markets will take note, perhaps before it shows up in the inventories but certainly as and when it does show up in the inventories," said Smith, whose bank is a top lender to the Russian oil industry.
Urals crude traded at a discount of $3.60 a barrel to benchmark dated Brent this week in northwest Europe, the lowest since May 2011, as seasonal demand in Europe fell and Russia launched a new export outlet in the Baltic.
Differentials of most physical crude grades in Europe are set against dated Brent, the physical grade that underpins Brent futures.
The slide in physical differentials has come despite fears that Europe could be short of some 700,000 barrels per day of oil from July, when it imposes an embargo on Iranian imports.
Reacting to those fears, oil-consuming countries including the United States and UK are considering releasing strategic stockpiles to keep oil prices from rising, and that move is pushing physical oil differentials down further.
WHEN IRAN CALMS DOWN
Differentials for Nigerian Qua Iboe are hovering near November 2011 lows, having failed to benefit from strong gasoline prices. Even Forties differentials, a key grade to set Brent prices, has come off sharply from its recent peaks despite new supply outages.
Azeri Light, the sweet, light darling grade of the European and Asian markets over the past year, has been the only exception in Europe in recent weeks, outperforming other grades. But Azeri sellers are pessimistic.
"What I see is that demand keeps plunging and supply is not being reduced," said a major trader in Azeri Light.
Some top industry executives share the opinion of traders that physical supplies are plentiful.
"The thing today is that the market doesn't swallow this price of oil," Christophe de Margerie, the chief executive of French oil major Total (TOTF.PA), told Reuters last month.
"This is why I strongly believe that this discussion about Iran, when it calms down, I hope the price of oil will go back to $115-$110," he said, adding that at the moment the company was forced to drastically cut runs at its European refineries to avoid losing money.
Physical crude oil graphic: r.reuters.com/buk47s
In Asian markets, DME Oman's premium against Dubai crude is near its lowest level this year. Reduced demand from European refiners has pushed about 5 million barrels of Urals crude to Asia, where refiners are in maintenance season.
That fall is happening even while countries such as Sri Lanka sign deals with Oman to buy crude to reduce dependency on Iranian oil.
"Even the loss of production in South Sudan, Yemen, Syria and less than full production in Libya and Nigeria has not created tightness. This is evident in the weaker spot prices of Nigerian, North Sea and Urals crude relative to Brent," said Roy Jordan from Facts Global Energy.
Urals contracts for differences (CFDs) - the only derivative instrument that indicates future sentiment for the grade - also show no significant spike in demand in the months to come.
CFDs show the Russian grade is expected to remain at a discount to dated Brent for the rest of the year, albeit a smaller one.
The discount to Brent is indicated narrowing to 70 cents a barrel in the third and fourth quarters, when seasonal demand typically picks up and the Iranian embargo comes fully into force.
(Additional reporting by Dmitry Zhdannikov, Florence Tan and Francis Kan in Singapore, editing by Jane Baird, Richard Mably)