Why Oil Prices Are Cut Off From Reality
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Why Oil Prices Are Cut Off From Reality


NEW YORK – April 5, 2019

Oil prices have reached multi-month highs and the future direction cannot be determined. Some experts believe that the market is on the verge of collapse

The efforts of the world's central banks have forced financial assets around the world to rise in price, playing almost all the fall of the end of last year. Crude oil futures are no exception, since they are also a financial asset.

Nevertheless, sometimes this asset still takes into account the fundamental factors, and here is not the most favorable picture.

The fact is that the world economy is very weak and so far only the indices of business activity, that is, surveys, speak about the slowdown.

Obviously, a slowing economy consumes less oil, moreover, expensive oil has an even stronger impact on economic growth.

However, large players can drag futures even higher if they want to, but this does not change the likelihood of a strong fall.

The only question is when this will happen and what could kick it off.

One thing is obvious: The basic laws of the economy are not reflected in the quotes of the main benchmarks of the oil market, which the Bloomberg agency writes about.

This is not only about general price fluctuations, but also about the specifics of the market.

US sanctions on the oil industry of Venezuela and Iran, as well as the reduction in production by the OPEC + group led by Saudi Arabia, create a shortage of heavy and medium oil with a relatively high sulfur content. At the same time, the US shale boom provides a significant supply of lighter and cleaner low-sulfur oil.

It would be logical if the prices for scarce oil with a higher sulfur content, of which Dubai is an indicative grade, would rise relative to Brent quotes, which serves as a benchmark for low-sulfur grades. However, exactly the opposite happens. The spread of these varieties shows that Middle Eastern oil has been trading at the lowest level since December to the North Sea mark.

Dubai's decline relative to Brent was due to the discrepancy in the profitability of oil refining into gasoline and fuel oil, according to a survey of four traders and analysts by Bloomberg.

Sulfurous oil usually produces more fuel oil, which is used as marine fuel and the margin on which is now falling. This is taking place on the eve of the entry into force next year of stricter regulations requiring the use of cleaner fuels in ships crossing oceans around the world.

At the same time, the gasoline production margin rose to more than $7 in March, while at the end of January it was at -$2 a barrel. Distillation of low-sulfur oil, the benchmark for which is Brent, usually gives more automotive fuel than varieties such as Dubai. This contributed to the growth of Brent prices relative to the Middle Eastern brand, according to a review of the consulting company FGE from April 2.

Author: USA Really