The global oil market is issuing warnings as demand increases

(Bloomberg) – The global oil market continues to send out warning signals about the prospects for weaker demand. In the latest, a closely monitored gauge of Asian crude consumption fell to a seven-month low as surging virus cases in China triggered lockdown-like restrictions at the world’s largest importer.

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The premium of Omani futures over Dubai swaps fell below $1 a barrel on the Dubai Mercantile Exchange on Thursday. It’s plummeted about 80% this month.

Oil markets weakened in November, with a number of widely observed metrics sounding warning signs and dragging futures prices lower. Among them, immediate spreads for both US prime Brent and West Texas Intermediate crude fell into contango, a bearish pricing pattern that indicates ample short-term supply. With red flags proliferating, Brent futures fell to their lowest price since January earlier this week.

Expectations of a recovery in Chinese oil demand are fading as daily cases of Covid-19 hit record highs, prompting officials to step up containment measures and movement limits. Amid this challenging backdrop, some Chinese refiners are refraining from buying cargoes of a preferred Russian grade, cutting demand just as traders await more details on a Group of Seven plan to limit Russian oil alongside European Union sanctions which will start on December 5th.

“The fact that it’s not injecting any premiums on Dec. 5 suggests the market is optimistic there won’t be any major supply disruptions, at least nothing on a sustained basis,” said Vandana Hari, founder of Vanda Insights in Singapore.

Brent futures headed for a third weekly drop on Friday amid further signs from China that virus restrictions in key cities are ramping up as officials try to crack down on the Covid-19 outbreak. In Beijing, the capital home to 22 million people, there has been a new round of restrictions, with residents asking not to leave.

The Oman-Dubai swap futures indicator, which fell below $1 for a day in April, has mostly commanded multi-dollar premiums since the Ukraine invasion. It surged as high as $15 in March as many buyers began to shun Russian oil, adding to the appeal of Middle East crude and boosting the premium.

With this month’s physical trading mostly concluded for January cargoes, spot premiums for key Persian Gulf grades have declined sharply. While China’s Rongsheng Petrochemical Co. bought about 7 million barrels in mid-month, that wasn’t enough to lift sentiment, traders in those grades said.

Meanwhile, another physical market indicator – Dubai’s inter-month swaps – entered contango on Friday, signaling a December-to-April downtrend, data from PVM Oil Associates showed. Prior to this week, the last time he was in contango was in April 2021.

Brent crude was trading at $85.97 a barrel on Friday after hitting $82.31 on Monday, the lowest intraday price since January.

(Adds analyst comment in fifth paragraph.)

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