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.
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.
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.