Oil has rallied to within sight of its 2010 high this week, but the physical crude markets in Asia and Europe are telling a more bearish story about oversupply and sluggish demand.
The contrast between the oil price, which topped $83 a barrel on Wednesday, and signs of weak physical markets might preoccupy OPEC when it meets on March 17 and raise the issue of whether markets have too much oil.
If you get on the ground and look at the fundamentals, you see too much crude oil production by OPEC, said Paul Tossetti, senior energy adviser at PFC Energy.
Russian crude prices have weakened and top oil exporter Saudi Arabia cut Asian oil prices to 14-month lows for April, while the Organization of the Petroleum Exporting Countries pumped the most oil in over a year in February.
OPEC is targeting Asian demand growth and members are mostly supplying customers there with full volumes even as they maintain curbs to Europe and the United States. Even so, the market is struggling to absorb the crude, traders said.
OPEC members are very bullish but they are all focusing on the one market in the world where there is growth. How much more crude can Asia absorb?, said a trader at an oil company.
Weakness in demand elsewhere, especially in developed countries, showed little sign of abating.
In the end, governments still need to get people back to work. Housing markets are still weak, said a senior trader with an oil major. Until that happens, how much more demand are we going to see?
The physical traders' views might be hard to reconcile with the rallying oil futures price.
Investors in futures markets for the past year have looked to wider economic data for signs of recovery. Oil has more than doubled since it sank to around $33 a barrel in December 2008.
In the view of some, oil's supply and demand fundamentals now are only a part of the picture.
Anybody who still believes that oil futures prices are a reflection of the true state of the physical market is living in a time warp, said David Hufton of oil brokers PVM.
That may be just as well for OPEC, as some signs from the physical crude market are not bullish.
Russian export blend crude oil, Urals, in northwest Europe was pegged at $2.70 a barrel below dated Brent on Tuesday -- the lowest discount since November 2008, according to Reuters data.
The discount has widened because of refinery maintenance work and limited demand from outside the region -- as well as signs of more barrels from OPEC members.
There is quite a lot of sour crude, said a trader with a European oil company. We also see more Iranian sour coming to Rotterdam. So there's less storage capacity for Urals.
Reduced volumes have been going from Europe to Asia, although Russia is sending supply of its new East Siberian Pacific Ocean (ESPO) blend to a port on the Pacific Ocean. That has lessened the pull of Urals east.
A further sign of weak sour crude markets was seen in Saudi Arabia's lowered official selling prices to Asia for April. In contrast, lighter crudes are being supported by the prospect of summer gasoline demand.
The sweet grades have recovered, but ESPO is affecting the ability of the sour crudes to follow, a trader with a northeast Asian refiner said. There is pressure from ESPO, so the Saudi OSP cut was very huge.
To be sure, demand for crude recedes in the second quarter after the northern hemisphere winter, so some of the bearishness in physical markets reflects seasonal factors.
It will be unclear how much was due to the seasons and how much to underlying demand until the summer driving season kicks in, traders said.
Physical markets were telling a different story a year ago -- tightening rather than weakening in line with the normal seasonal pattern.
One difference is OPEC was then meeting four-fifths of its pledge to curb output by 4.2 million barrels per day (bpd), rather than just over half now.
Another difference is oil futures are above the $70-$80 range that many in OPEC say they prefer and oil demand is expected to recover later in the year. That makes any supply cut unlikely, despite indications from physical markets.
This is a good world for OPEC, Tossetti said. They've raised production and prices have stayed at $70 to $80 and are now slightly above. There's no reason for them to do anything.
(Additional reporting by Simon Webb in Dubai; Editing by James Jukwey)