Brent oil futures may be trading at $27 per barrel but oil producers are selling their crude in the physical market at lower prices not seen since the aftermath of the Asian financial crisis of the late 1990s.
Most are offloading their oil for below $20 a barrel as the coronavirus pandemic savages demand and global supply rises amid a battle between Saudi Arabia and Russia for market share, according to traders, state oil firms, major refiners and prices quoted in physical markets.
While some crude grades typically sell at a discount to Brent, the market environment is making that gap even wider and other grades that usually cost more than the European benchmark are now cheaper for the most time ever.
The discounting is leaving revenue per barrel at a fraction of the prices factored into many 2020 budgets, which is likely to put even more pressure on government finances in some oil producing countries.
In extreme cases, once discounts and other costs have been applied, the value of some producers' oil is close to $10 a barrel while Venezuela's Merey crude sold for as little as $8 last week, according to Refinitiv data and traders.
While all types of crude have been hit, so-called light and medium sweet grades are the least in demand, meaning the outlook is bleaker for countries such as Azerbaijan, Kazakhstan and Nigeria, according to traders in oil from those countries.
Light grades with low density and sulphur are mostly used to make naphtha, gasoline and jet fuel, refined products that are both out of favour because of the economic fallout from the pandemic and also hard to store for long.
While Moscow and Riyadh remain locked in their battle, physical oil traders say a glut might push prices even lower as more countries lock down and trade slows.
This week, Russia got as little as $18 per barrel for its benchmark export grade medium sour Urals while Saudi Arabia was selling its Arab Light in Europe for $16, according to Reuters calculations based on official Saudi prices and Urals deals.
Canada's key Western Canada Select grade was worth $15 a barrel on March 16, the last day of its monthly trading cycle, and will now probably sell closer to $10 if its last discount of $13.6 to the U.S. WTI benchmark is applied.
Traders said the pressure on prices and the desire on the part of sellers to offload crude quickly was evident in the way deals were being struck at the moment.
"Normally, we used to discuss cargoes at bid versus offer spreads of around 10 to 20 cents for several weeks before we closed a deal," one trader at a major refining firm said.
"Now, we have bid versus offer spreads of $2 to £3 a barrel and they're done immediately."
DOWNWARD CORRECTIONS
Just last week, analysts and leading traders predicted global oil demand would drop by 10 million barrels per day, or 10% in the next months. A week later, top trading house Vitol said it expected a 20% loss over the next few weeks.
Indian refiners are cutting back on output while European plants are considering closures. Chinese demand is recovering but it's the only bright spot as the United States, which consumes a fifth of the world's fuel, is locking down.
In a sign of the demise of sweet grades, Azeri Light is being priced at about 50 cents below dated Brent, the first time it has ever fallen below the European benchmark. Forties, a North Sea light sour oil, has fallen to $1.65 a barrel below dated Brent, its lowest since 2008.
Gasoline and jet fuel do not store as long as other products due to their high quality, seasonality and additives. Diesel, fuel oil and crude oil, meanwhile, can sit in tanks for years.
"You can't store winter gasoline with the summer version and now is the time when you have to switch. You can't really hold gasoline in tank for longer than six months," said a European crude and products trader.
"Sour grades are more economic right now for refiners but that is only temporary as we will end up with a flood of diesel and fuel oil," he said.
Nigeria, which is the biggest oil producer in Africa and relies on crude for 90% of its foreign exchange earnings, is struggling to sell its mainly light, sweet oil to refiners - despite record price cuts.
Algeria's light, sweet Saharan Blend and Kazakhstan's light, sour grade CPC Blend, meanwhile, are trading at eight-year lows with discounts of $2 and $4 to the price of Brent respectively.
Traders said cargoes of crude for delivery in April had not been hit too badly because many of the deals were struck before the oil market rout, but now prices would only go lower still.
"April was sold quite ahead of time as refiners plan several months in advance but May will not be good. All the grades will need more downward corrections," one trader said.
(Reporting by Julia Payne; Additional reporting by Olga Yagova in Moscow and Shu Zhang in Singapore; Editing by Dmitry Zhdannikov and David Clarke)
