Physical oil and futures align to tell story of a tighter market.

slamabad: However, premiums for heavier grades, which produce more fuel oil, also continue to rally due to a deficit created by US sanctions on Iran and Venezuela. In addition, the structure of the oil futures market shows that premiums of front months to later dates - known as backwardation - have narrowed in recent weeks, also suggesting the market's expectations of a glut are diminishing somewhat.

To be sure, benchmark oil futures do not necessarily follow the physical market and could still decline next year if global oil demand falls because of the US-China trade dispute or if US oil output surprises again on the upside. Soaring physical crude prices are also negatively impacting refining margins, often prompting refiners to cut processing. New marine fuel rules have created a rally in certain crude oil grades.

From January 2020, the United Nations' International Maritime Organization (IMO) will ban ships from using fuels with a sulfur content above 0.5 percent, compared with 3.5 percent now, unless they have sulfur-cleaning kits called scrubbers.

Nigeria's biggest crude stream, Qua Iboe, is valued at a premium of $3.30 a barrel, the highest since 2013, Refinitiv Eikon data shows. Azeri Light, or BTC, has a premium of $5.10 to the benchmark, its highest since 2013.

Both crudes are valued especially highly by simple refineries as they are ideal for producing IMO-compliant bunker fuel oil, said Eugene Lindell, an analyst at JBC Energy in Vienna. "The focus now is on not producing high-sulfur fuel oil at all costs. If you are a simple refinery, it comes down to choosing the right crude," he said. "The end result is a lot of people are going to be seeking these grades and that boosts the price. They will remain strong and may increase further."

While the rally in those two light, sweet grades stands out, sour crudes such as Russian Urals have been supported by...