Spot premiums for crude oil produced in Europe and the Middle East have rocketed to record highs this month, tracking a rally in global prices as refiners snap up supplies and producers struggle to ramp up output to meet rising demand.
In Asia, refining margins are back at 2018 highs as demand for most oil products has rebounded to pre-pandemic levels or higher.
However, most producers in the Organization of the Petroleum Exporting Countries are already short of spare capacity as they play catch-up with the sharp rebound in global fuel consumption.
European refiners concerned about potential sanctions on Russian oil if the Ukraine crisis escalates are seeking oil alternatives from elsewhere in Europe, Africa and the Americas, tightening supplies and pushing North Sea crude premiums to record highs, traders and analysts said.
"It is largely driven by the strength in refinery margins, and specifically the strength in middle distillates," said Warren Patterson, head of commodity research at ING.
"The Russian uncertainty is probably also playing a part, with European refiners hesitant to lock in Russian crude."
While spot premiums for North Sea Brent, Forties and Ekofisk crudes have jumped to record levels, Russian Urals slumped recently to its steepest discount to dated Brent for Northwest Europe since COVID-19 hit in April 2020, Refinitiv data showed.
The strong pull for immediate supplies within Europe stretched the backwardation for prompt February-March dated Brent to more than $3 a barrel, traders said, sending ripples to Asia. Front-month prices are higher than those in future months in a backwardated market, indicating tight supplies.
Weak margins for high-sulfur fuel oil have also lowered refiners' valuation for Urals crude, one Singapore-based trader said, adding that low profit for the fuel has also widened the price gap between sweet and sour crudes. For example, Brent's premium to Dubai swaps jumped above $6 a barrel to 2013 highs this week.
The steep premiums within Europe are keeping Brent-linked supplies from Europe and Africa out of Asian buyers' reach, limiting their options to Middle East and Russian grades.
Strong demand for these grades pushed Middle East benchmark Dubai and spot premiums for Abu Dhabi's Murban and Qatari al-Shaheen crude to record levels this week, while Russian grades ESPO Blend and Sokol are at more than two-year highs.