Global oil market flashes warnings as demand approaches peak

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(Bloomberg) — The global oil market continues to flare up over prospects for weaker demand. A closely watched gauge of Asian crude oil consumption fell to a seven-month low as rising virus cases in China triggered lockdown-like restrictions on the world’s largest importer.

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The premium of Oman futures over Dubai swaps fell below $1 a barrel on the Dubai Mercantile Exchange on Thursday. It’s down about 80% this month.

Oil markets weakened in November, with a host of high-profile statistics sending warning signs and dragging futures prices down. Among them, fast spreads for both Brent oil and the leading U.S.-grade West Texas Intermediate have narrowed to contango, a bearish price pattern that points to ample supply in the near term. As red flags multiplied, Brent futures fell to their lowest price since January earlier this week.

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Expectations for a recovery in Chinese oil demand are waning as daily Covid-19 cases have reached record levels, prompting officials to ramp up containment measures and restrictions on movement. Amid the challenging backdrop, some Chinese refiners are refraining from buying shipments of a favored Russian grade, reducing demand as traders await more details on a Group of Seven plan to capture Russian oil alongside the sanctions of the European Union which take effect on 5 December.

Brent futures headed for a third weekly drop on Friday amid further signs from China that antivirus restrictions are tightening in key cities as officials try to contain Covid-19 outbreaks. In Beijing, the capital city home to 22 million people, there has been another round of curbs, asking residents not to leave.

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The Oman futures-Dubai swaps gauge, which fell below $1 for one day in April, has mostly yielded multi-dollar premiums since the invasion of Ukraine. It spiked to $15 in March as many buyers began avoiding Russian oil, increasing the appeal of Middle Eastern crude and increasing the premium.

With physical trading largely closed this month for cargoes to be loaded in January, spot premiums for key Persian Gulf grades have fallen sharply. Although China’s Rongsheng Petrochemical Co. bought about 7 million barrels midway through the month, that wasn’t enough to improve sentiment, traders of those grades said.

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Meanwhile, another physical market indicator — Dubai intermonth swaps — turned contango on Friday, signaling bearishness for December through April, data from PVM Oil Associates showed. Before this week, the last time it was in contango was April 2021.

Brent was trading at $85.72 a barrel on Friday after reaching $82.31 on Monday, its lowest intraday price since January.

(Adds details about the Beijing outbreak in the fifth paragraph.)

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