A fall in the number of North Sea crude oil cargoes in September due to oilfield maintenance and natural decline has helped push global benchmark Brent to a three-month high and raised fears a distorted market could drive near-term prices even higher.
North Sea crude oil output from 12 production streams will fall by about 17% in September from August, mainly due to a drop in Forties crude production as the Buzzard oilfield will be offline for maintenance.
Buzzard is the UK's largest oilfield and is suspending output until about mid-October. Buzzard is the single biggest contributor to the Forties stream, which in turn is the largest of four crude flows that set the price for Brent.
Maintenance at other North Sea fields, including Norway's Troll, will also impinge, and there will be just one 650,000-barrel cargo of Flotta, the smallest North Sea stream.
As a result, supply from the 12 North Sea crude streams tracked by Reuters will average 1.573 million barrels per day (bpd) in September, down from 1.905 million bpd in August, according to Reuters calculations on Monday based on loading programmes.
The drop in production has led some analysts to express concerns that Brent could be vulnerable to distortions as traders scramble to secure physical cargoes. Brent crude futures for September are currently trading at a three-month high of about $114.60 a barrel, up from about $106 a barrel at the start of August.
The rally has been accompanied by a steepening in the Brent futures curve, with the backwardation at the front end widening. Backwardation is when the price of crude for immediate delivery is higher than the price for delivery at future loading dates.
The September Brent contract is currently trading at a premium to October of $1.96 a barrel <LCOc1-LCOc2>, up from $1.64 last Wednesday, indicating a jump in the price of oil for immediate delivery.
The September contract will expire on Aug. 16. Some market participants said the approach of expiry was helping to push spreads out, because some traders will need to secure delivery against their futures positions.
"I think September/October will expire at about $3 a barrel," one trader said. "There is just nothing to deliver into that contract."
Analysts at Bank of America Merrill Lynch (BoAML) noted that serious structural issues have hampered North Sea output this year. These include a Norwegian oil-workers' strike earlier this summer, which led to the shut-in of 150,000-180,000 bpd at Oseberg, and the persistence of technical issues at the Grane and Orman Lange fields.
These structural issues, together with the blockade of Iranian crude oil exports by Western powers, could lead to a period of "super-backwardation" in Brent, BoAML analysts suggested in a note on Monday in which they described Brent as "tight as a drum".
The spread between the September and December Brent contracts has also widened to around $3.40 a barrel.
Brent's premium to the U.S. crude contract <CL-LCO1=R> is at about $21 a barrel, out from about $8 a barrel in mid-June and the widest since April this year. The wide spread is partly because U.S. crude stocks at the key delivery point of Cushing, Oklahoma remain in excess of the five-year range for this time of year, despite last week's strong decline.
Below are details of planned export schedules for the North Sea, compared with the previous month. Total volumes are in millions of barrels and loading rates are in barrels per day (bpd). August totals exclude revisions to original loading programmes.