European refiners oversupplied as oil shortage fears subside

European refiners have found themselves oversupplied with crude as an expected shortage owing to the looming EU ban on Russian oil has yet to materialise.

The front-month Brent crude futures spread narrowed sharply this week, reflecting better supply in the physical oil market as fears over the EU embargo on Russian crude begin to subside.

Premiums on prompt prices to future prices - known as a backwardated market structure - usually indicate supply tightness.

Traders cited Europe's ability to replace Russian oil with grades from the Middle East, the United States and Latin America while Asia is asking for less crude because of an economic slowdown and increased use of Russian barrels.

Brent futures prices have also slumped by about 7% this week, weakening for a second week in a row.

"There's too much oil around," one European crude trader said.

"(European] refiners seem to have overbought in November and December, probably because of fears around Urals," he said, adding that French strikes and refinery maintenance also contributed to a crude overhang.

Russian Urals crude prices jumped in August as traders and refiners rushed to buy as many barrels as possible, fearing the EU ban on Russian oil would lead to shortages.

The EU will ban Russian crude imports from Dec. 5 and oil products from Feb. 5. A G7 price cap on Russian crude also comes into effect on Dec. 5.

"The expectation of a tight market has not been realised," a second European trader said, adding that oil from Brazil, Guyana, Canada and the U.S. Midland region was heading to Europe to improve the supply picture. However, he cautioned that supply is likely to tighten again in the new year.

ALTERNATIVES SOURCES

Traders said refiners have adjusted to living without Russian crude, which had been a mainstay of Europe's refining system.

As a result, premiums for alternative grades such as Kazakh CPC Blend, West Africa and WTI Midland have all come under pressure.

European imports of Latin American crude have soared since Russia's invasion of Ukraine, averaging 313,000 barrels per day (bpd) this year, up from 132,000 bpd in 2021, Refinitiv Eikon data shows.

In July alone, Europe imported nearly 600,000 bpd of crude from the region, the highest since at least 2015.

U.S. crude imports have also increased, rising to 1.1 million bpd already this year, compared with 800,000 bpd for the whole of last year.

WTI Midland prices weakened to their lowest since mid-June because of a supply overhang.

Iraq also increased exports to Europe by more than 20% year on year in the July-November period, Refinitiv Eikon data shows, as Iraq faces more intense competition in Asia from cheaper Urals oil.

In Asia, spot premiums for Middle Eastern grades have plunged in recent days, with Dubai's premium touching its lowest since late January. Chinese refiners, meanwhile, have asked for less Saudi crude in December because of an economic slowdown.

"Nobody is screaming for crude right now," a third European trader said.