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Headache for OPEC as oil market structure signals return of glut
By Shu Zhang, Florence Suntan and Dmitry Zhdannikov
Singapore/London: Soaring OPEC and U.H. oil supply, coupled with stalled economic and crude need recovery, have pushed this futures market structure to indicating a surplus, previous observed during oil’s fail in April and May in the midst of the coronavirus pandemic.
The development is a headache for OPEC, which had been wishing demand would recover more rapidly after a round of document global output cuts. The girls will either have to think about further production cuts or maybe tolerate lower oil costs for longer.
The extra market structure, when quick prices are weaker compared to future prices, is also a great asset for traders, as they may store crude in the anticipate to resell it later with a profit. Royal Dutch/Shell, Overall, Eni and Norway’s Equinor have all reported bumper trading profits over the past week.
Front-month September Brent futures previously week have been trading for less of $2 per barrel or clip to March 2021, this steepest discount since May well, when lockdown measures from the virus outbreak cut international oil demand by a 3 rd.
The structure is known as contango and usually indicates a quick oil surplus and expectation for a demand recovery at a later date months. The opposite structure is well know as backwardation.
“OPEC’s experiment to increase production via August could backfire as we are still nowhere next to out of the woods still in terms of oil need,” said Bjornar Tonhaugen, Rystad Energy’s Head of Oil Market Research.
“The market will flip back into the mini-supply glut and a swing action into deficit will not occur again until December 2020.”
OPEC did not answer a request for brief review.
Howie Lee, economist on Singapore’s OCBC bank, claimed the market was unconvinced demand was recovering and as a result was choosing to buy more down the curve at a climbing premium.
Record coronavirus illness and death rates in the usa and some other parts of the entire world are stoking fears which a new virus wave can further hit demand.
Many exchange traded funds were spreading their long opportunities more equally across the shape after some asset supervisors were badly burnt by means of April’s negative expiry of U.S. front-month WTI crude futures, Lee claimed.
Brent spreads have traditionally been a good proxy for the global production-consumption balance as well as inventories
Physical Crude Weakness
The actual physical oil market is also draining.
Cash Dubai and DME Oman prices on The following thursday flipped into discounts to be able to Dubai swaps for the 1st time since end-May due to weakened demand including from China. China August/September inter-month spreads in addition flipped from backwardation in contango in late July.
Abu Dhabi, Iraqi and Qatari grades all fell to identify discounts to their official prices and some cargoes are still suspending unsold, according to three Oriental traders.
Demand from best buyer China softened because of weak margins, prolonged dock congestion, severe flood together with limited crude import quotas, several China-focused traders thought.
In Europe, rising You.S. exports are also demoralizing spot physical prices.
“U.S. producers are returning wells they had previously closed… Given the disappointing need, it raises the possibility that the market returns to building stocks,” said Warren Patterson from ING.
U.H. crude exports have risen up to 3.2 million barrels per day last week, the highest considering mid-May. Much of this U.S. production curtailments in the spring came from shale wells that were choked again but not shut-in completely.
WTI at Midland, Texas, the guts of the Permian pot, this week slid to trade at a discount to benchmark futures and options as curtailed volumes delivered to the market, traders claimed.
“The market is most surely feeling this effects of the China buying ending following your massive buying seen during the last few months,” said Al Shelton from United ICAP.