No cheer for OPEC

Non-OPEC sup­ply is go­ing to be stronger than de­mand growth


As if a mini-col­lapse in oil prices wasn’t bad enough for the Or­ga­ni­za­tion of Petroleum Ex­port­ing Coun­tries (OPEC), the pat­tern in which fu­tures con­tracts are trad­ing years from now has flipped into the worst pos­si­ble struc­ture for the ex­porter group.

Brent and West Texas In­ter­me­di­ate crudes, down al­most 15 per cent since late May, are both trad­ing in con­tango, where for­ward prices get higher all the way into the next decade.

While it’s a struc­ture that nor­mally de­notes weak de­mand for spot car­goes, the price pat­tern could also be bad news for the OPEC as it can some­times tempt pro­duc­ers out­side the group to lock in out­put for fu­ture years.

Back­war­da­tion ban­ished

Un­til last week, the for­ward curves for Brent and WTI had partly been trad­ing in back­war­da­tion, mean­ing some prices were lower fur­ther in the fu­ture. That flipped into full con­tango last week, as the US En­ergy In­for­ma­tion Ad­min­is­tra­tion un- ex­pect­edly said crude in­ven­to­ries rose 3.3 mil­lion bar­rels.

The struc­ture be­came even more en­trenched on Wed­nes­day when the IEA said non-OPEC pro­duc­ers led by shale will add bar­rels more quickly than any ex­pan­sion in global con­sump­tion.

Brent time-spreads be­tween De­cem­ber 2017 and 2018, and then 2018 to 2019, are trad­ing in the deep­est con­tan­gos since mid-Novem­ber, the most bear­ish struc­ture since be­fore OPEC agreed to cut out­put.

OPEC dis­con­nect

The in­crease in later-dated fu­tures has been driven by a surge of ac­tiv­ity from con­sumers such as ship­ping com­pa­nies and air­lines, while bullish bets on the mar­kets struc­ture have been un­wound, said Thibaut Re­moun­dos, founder of Com­modi­ties Trad­ing Cor­po­ra­tion Ltd..

Con­sumers have been quick to lock in cheap fu­ture sup­plies as crude prices have dropped be­low $50. Cit­i­group Inc an­a­lysts, in­clud­ing Daoyuan Zhou, wrote in a report on Fri­day that struc­tural changes in the op­tions mar­ket are likely a re­flec­tion of con­sumer ac­tiv­ity be­ing stepped up.

Pro­duc­ers may hedge 1.3 bil­lion bar­rels of next year’s crude sup­ply in the sec­ond half of this year, BofA Mer­rill Lynch an­a­lysts wrote.

The weak­ness of crude time­spreads has out­paced the de­clines in the near­est prices. That’s a sign that mar­ket con­cerns about a lin­ger­ing sup­ply glut have ex­tended be­yond the short term into later years.

Some of the world’s big­gest banks have also grown in­creas­ingly pes­simistic about the prospects for crude prices into next year. Mor­gan Stan­ley said re­cently that OPEC will need to ex­tend cuts for the whole of 2018 if it wants to keep the mar­ket in bal­ance.

Mean­while, JPMor­gan slashed its fore­cast for next year by $10, an­tic­i­pat­ing “a sub­stan­tial build in in­ven­to­ries” as US shale pro­duc­ers ramp up out­put.

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