Desperate oil producers slash prices as global demand evaporates

[SINGAPORE] Oil from Russia's north-eastern coast of Sakhalin to shale formations in the US Permian basin is going cheap as sellers are forced to slash prices in a desperate attempt to attract buyers.

Refiners across the world have made deep cuts to crude processing rates due to slumping consumption and a growing fuel glut, leaving producers struggling to find buyers for their cargoes. Sellers are aggressively dropping the price of their oil while they tussle for the remnants of demand, with the prospect of forced output cuts looming as global storage swells.

The spot differential for Russia's Sokol was at a discount of about US$8 a barrel against Dubai crude this week, according to traders who asked not to be identified. That's the lowest in more than five years and a whopping US$11 less than the last reported deal of the grade. Australia's Varanus traded at a discount of between US$13 and US$14 against London's Dated Brent, compared with a US50-cent premium for the previous cargo.

While oil futures rallied almost 40 per cent last week following efforts by US President Donald Trump to coordinate support for a cut to supply by global producers, there remains a deep strain on the physical crude market. Storage tanks are filling fast across the world including at the 45 million-barrel Saldanha Bay terminal, a key hub in Africa, while scores of supertankers have been chartered for long-term floating storage plays.

The consumption of jet fuel to gasoline has plummeted as governments try and curb the spread of the coronavirus pandemic by forcing people to stay at home. While China remains a bright spot as people return to work and factories begin to reopen after a prolonged shutdown, activity at Indian ports has slowed and the nation's refiners are curbing processing amid a crippling lockdown.

However, oil traders still have their sights on sending unsold crude to Asia, even as refinery margins in the region swing between profits and losses. The market phenomenon known as super-contango, where prompt crude prices are sharply below cargoes for delayed delivery, means that the cost of chartering a tanker can be offset by such gains, making the strategy viable.

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