Refiners feel heat physical crude trades higher than futures prices

India's oil refiners are facing significantly higher prices for physical crude than the futures prices dominating the headlines -around $108 a barrel on Monday-as Gulf supplies remain constrained, industry executives said.

Between September 1 and 22, the latest period for which US Energy Information Administration (EIA) spot-price data is available, Brent spot prices averaged about $12 a barrel above November Brent futures prices, with the gap widening by as much as $22 on September 15. The spot price was more than $15 above the futures rate on several days in the latter half of the period. The EIA spot price provides a reference for the physical Brent market, where actual crude cargoes are bought and sold. Industry executives said futures prices do not reflect current conditions in the physical market, with suppliers demanding premiums of up to $20 a barrel over the futures prices. The physical market is tight, primarily because Gulf supplies remain constrained, they said.

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The November Brent futures price is the price at which a standardised contract for November delivery trades in the futures market. Most participants use such contracts to hedge or take a view on prices rather than to take physical delivery of crude. The price refiners pay for crude is linked to physical-market benchmarks, which are averaged over the crude's loading month for most purchases.

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The final price also reflects a differential for the specific grade and other contractual terms. This means higher physical-market prices feed into refiners' procurement costs even when the futures prices attracting market attention are lower. Crude purchase deals are typically struck about two months before delivery. A cargo purchased in September, for example, may load in October and arrive at the refinery in November, with its price determined by the physical-market benchmark averaged over the October loading month. The headline futures price at the time of purchase, therefore, may not reflect the price ultimately used to calculate the refinery's crude cost.