Europe, Africa oil markets weaken on refining maintenance, extra supply

Crude oil physical markets in Europe and Africa have weakened in response to peak refinery maintenance and extra supply from the United States and Saudi Arabia, dampening the impact of Red Sea shipping delays, according to traders, flows data and analysts.

These factors, to some extent, mitigate the effect that rising crude prices will have on energy costs. A jump in energy costs could threaten to unwind some of the recent falls in global inflation just as central banks are expected to begin cutting interest rates.The outright Brent futures price, having stayed in a narrow range for much of 2024, has gained in the last week partly due to Ukrainian attacks on Russian refineries. Brent LCOc1 traded at around $85 a barrel on Thursday, up 10% this year.

Still, this year there is an unusually high level of planned work at European refineries, reducing crude demand, analysts and traders say. European oil refiners usually carry out maintenance in the spring, ahead of peak summer driving demand.“April will see refinery maintenance peak across Europe,” said Viktor Katona, lead crude analyst at Kpler. “Even though April-refined barrels have been trading for quite some time, it is only now that the pricing impact is finally kicking in.”

U.S. WTI Midland crude, the largest crude underpinning the Brent oil physical benchmark, has weakened in Europe to trade at a discount to benchmark dated Brent, down almost $2 a barrel from the start of March, according to Reuters calculations.In West Africa, crude differentials are also easing, traders said. Nigerian grade Qua Iboe has eased to dated Brent plus $3.10 from a 2024 high of plus $4.00 reached earlier in March, according to LSEG data.

In the Mediterranean, Azeri Light crude’s premium has dropped to dated plus $2.50 from near plus $4 last week.The amount of European crude refining capacity offline due to maintenance is expected to peak in April at about 1.7 million barrels per day, data from IIR Energy show, significantly higher than the same time last year.

More tankers are avoiding the Red Sea since Yemen’s Houthis began drone and missile attacks against shipping in mid-November, keeping millions of barrels of crude at sea for longer.But at the same time, the European market is seeing extra crude supply from other places, notably from the United States. Europe will import 2.15 million bpd of U.S. crude in March, according to Kpler, the second-highest ever.

More supply is also coming from the Middle East. Oil flows to Egypt’s Sidi Kerir port, which brings Middle East crude to Europe, in February averaged 993,000 bpd, up from 585,000 bpd in January and the highest since April 2020, Kpler data show, the bulk of which is Saudi crude.“April maintenance,” a trader said of the weakening in crude differentials, also citing the extra Saudi crude from Sidi Kerir.

Other parts of the crude market have weakened slightly, although supply is still relatively tight.Earlier this month, OPEC+ members led by Saudi Arabia and Russia agreed to extend oil output cuts of 2.2 million bpd into the second quarter, giving extra support to the market amid concerns over global growth and rising output outside the group.

The benchmark Brent crude futures market structure has edged back from its most bullish since October. The premium of the first-month contract to the six-month contract LCOc1-LCOc7 stood at $3.79 a barrel on Thursday. It reached $4.76 at the end of February, the highest since October.This structure, called backwardation, indicates a perception of tight prompt supply.“The Brent structure is weakening – physical Brent for next week is now priced under the June forward contract. U.S. exports and refinery maintenance are certainly factors in this weakness,” said Tamas Varga of oil broker PVM on Thursday.

While the outright Brent price has gained, a potential rise in Russian crude exports following the refinery attacks could weigh on Brent relative to the U.S. WTI benchmark.“It seems that Russia will be forced to send increasing volume of crude oil abroad,” Varga said. “Therefore, considerable strength in the European benchmark relative to WTI or products, does not look imminent.”