Julia Payne and Florence Tan by Arathy Smasekhar

LONDON/BANGALORE/SINGAPORE (Reuters) – Frantic oil buying driven by supply outages and signs the Omicron variant won’t be as disruptive as feared has pushed some crude grades to multi-year highs, suggesting the rally in Brent futures could be sustained a while longer, traders said.

The prices for physical cargoes don’t always trade along with the oil futures. If differentials increase rapidly or significantly, this could indicate that speculators are either too short of fundamentals or have oversold futures.

The futures market has risen 10% over the previous year. However, there is still a lot of momentum in the physical market. Some grades have seen multi-year high differentials. These indicate that the market is tight and will continue to push forward the futures rally.

“These numbers are unbelievable. A North Sea oil trader stated that there is clearly physical tightness.

The benchmark Forties were traded at an all-time high of $2.80 per barrel at Dated Brent on Thursday.

Others North Sea grades also reached new highs over the past year. The prices of key West African grades, such as Nigeria’s Bonny Light, have also increased since the beginning.

Graphic – Atlantic Basin crude differentials jump: https://graphics.reuters.com/OIL-DEMAND/klvykqjxbvg/chart_eikon.jpg

As Asian buyers began to search for lower cargoes, the tightness spread from the Atlantic Basin. The difference in crude crude prices from Oman, Russia’s Far East and UAE has risen as Brent crude’s premium for Dubai swaps have reached their highest level in 2 months.

Prices have been influenced by many factors. The fourth quarter’s wildfire spreading of Omicron has seen oil demand not be severely affected. This is a surprising result for refiners, who have reduced their purchases. The gap is now a problem.

At the beginning of this year, violent protests in Kazakhstan sparked fears about an extended oil shortage. This did not happen and would have led to outages in Canada, Ecuador, Libya, Canada, and Ecuador. The Ecuadorian and Libyan outages, which took out approximately 1,000,000 barrels each day, were resolved in large part over the last week.

Despite repeated requests from the United States, OPEC has maintained its timeline of slowly increasing output. The nuclear talks with Iran that would also increase supply appear to have stalled.

“Turns out Omicron wasn’t so bad and supply issues were worse than anticipated,” a trader said.

“(Buyers), are snapping up every grade of everything.”

The inventories in Canada and the United States have both declined. On Wednesday, the U.S. Energy Information Administration reported that crude oil inventories fell beyond what was expected. This is their lowest point since October 2018.

According to a U.S. trader, “With spring coming and summer upon us… people are getting ready for strong markets.”

Some traders believe that the market may run out of steam because of new COVID variations, seasonal refinery maintenance in quarter two, and possibly a slowdown in China.

A market player that spoke out about the recent rally said, “I believe it’s more trying get ahead of tightness…back to a ‘herd of lemmings’ market dynamic.”

Graphic – Physical price of North Sea Forties grade vs Brent futures: https://fingfx.thomsonreuters.com/gfx/ce/akvezejbapr/forties%20vs%20brent%20futures%203%20month.jpeg