Oil market sees support from physical tightness | Reuters

Oil market sees support from physical tightness | Reuters

Benchmark oil prices have dropped by about $15 a barrel in the past 10 days as the threat of recession clouds the demand outlook, but the physical oil trade and the futures market structure tell a quite different story.

Growing concern about the economic outlook pushed Brent crude below $100 a barrel last week for the first time since April.

But in the physical market, premiums have been at record levels. Nigerian Qua Iboe crude was offered at $11.50 a barrel above dated Brent this week, while North Sea grade Forties was bid at dated Brent plus $5.35 on Tuesday - both all-time highs.

And while the outright Brent price has fallen almost 20% since May, the premium at which the nearby contract is trading to the second month - a structure known as backwardation, which implies tight prompt supply - has widened to $4.09 a barrel.

That suggests strong underlying support for near-term prices despite the drop in the benchmark Brent contract.

"Outright prices and the structure are out of sync," said Tamas Varga of oil broker PVM. "It implies genuine strength on the physical front that goes against the sentiment in the futures market."