LONDON (Reuters) - As oil prices fall to new multi-year lows on a global glut, the structure of the niche but crucial benchmark Brent market has shown counter-intuitive signs of tighter supplies and strengthening.
The reason, according to some in the market, was an unusual accumulation of British Forties crude oil cargoes by Royal Dutch Shell, and the expected shipment of many of these out of Europe to South Korea and China.
Shell may have bought more than half of the Forties cargoes loading in January, according to estimates from North Sea crude traders. Price differentials for Forties, which is the largest of the four North Sea crudes that underpins the dated Brent physical benchmark, rose.
“I think it has to do with Shell’s position,” said a North Sea trader with another company, referring to the strengthening in Forties differentials seen during late December. “Lack of Forties availability.”
A spokesman for Shell, which usually does not comment on trading, declined to comment on Wednesday.
In January, Shell is shipping three or four Very Large Crude Carriers of Forties to Asia, according to Reuters shipping data and trade sources. If all sail, that would be about 8 million barrels, more than half of the month’s Forties production.
South Korea is a regular buyer of Forties as its crude imports from the European Union are tax-free under a free trade agreement. Still, four supertankers of Forties heading east would be an unusually large volume - the most that one trader could recall seeing in a single month.
While the outright price of Brent crude - which traded at $30.34 a barrel on Tuesday, near a 12-year low - was falling, Forties and the wider Brent market were getting stronger.
Forties price differentials rose and on Jan. 4 reached their highest since February 2014, and have since fallen.
Short-term swaps called contracts for difference(CFDs) used by traders to hedge price risk briefly shifted to a premium for supplies for prompt delivery - a structure known as backwardation and unusual when supply is generally ample.
In a further sign of unusual strength, the spread between the prompt and second-month Brent futures prices rose sharply even as the outright price of Brent tumbled.
The spread moved into backwardation on Wednesday, a day before the February Brent contract expires, while the rest of the Brent market remains in the opposite structure, contango, until 2017.
Another reason for the strength in differentials was bidding by oil refiner Petroineos for Forties cargoes, which in the view of other market sources were unlikely to be sold as they were heading for Asia.
“You could say Petroineos was bidding into a vacuum as Shell was unlikely to sell the cargoes,” said an industry source who declined to be identified. Petroineos did not immediately respond on Wednesday to a request for comment on why it was bidding.
There are a small number of participants in the Forties market and it is not uncommon for them to accumulate large positions and this does not contravene any regulations.
Shell itself took a similarly large Forties position four years ago, trade sources said at the time.
Additional reporting by Simon Falush; editing by William Hardy