Oil in­vestor im­pa­tience grows over global sur­plus

Kuwait Times - - BUSINESS -

Oil in­vestors are grow­ing in­creas­ingly dis­grun­tled with the pace at which sup­ply and de­mand are re­bal­anc­ing, cut­ting their bullish bets and push­ing the bench­mark price to its biggest dis­count rel­a­tive to fu­ture prices in nine months. The pre­mium of Brent crude fu­tures for de­liv­ery in six months over those for prompt de­liv­ery, one mea­sure of con­fi­dence in the mar­ket out­look, yes­ter­day shot to its largest since Fe­bru­ary, the point at which OPEC first floated the idea of a pos­si­ble deal on out­put to erode a two-year-old global sur­plus.

The spread, or con­tango, is now at $3.51 a bar­rel , up from $2.30 at the end of Septem­ber, when OPEC an­nounced its in­ten­tion to strike a deal to cut pro­duc­tion when it meets in Vi­enna later this month. Gen­er­ally, a widen­ing in this spread can in­di­cate one of two things: ei­ther in­vestors have grown more pes­simistic over the prospect of a rally in prices for prompt de­liv­ery, or they are more op­ti­mistic over the like­li­hood of a longer-term rally.

In this case, the prompt Brent con­tract has led the move, hav­ing fallen by 5.2 per­cent since the end of Septem­ber, com­pared with a fall of 2.6 per­cent in the price of oil for de­liv­ery in six months. The in­creas­ing con­tango is re­ally about the phys­i­cal side of the mar­ket,” SEB chief commodities strate­gist Bjarne Schiel­d­rop said.

“We’ve had an in­crease in in­ven­to­ries rather than a de­crease that has co­in­cided with re­fin­ery out­ages. It’s not a pretty sight.” The most re­cent Reuters sur­vey es­ti­mated OPEC sup­ply hit a record high of 33.82 mil­lion bar­rels per day (bpd) in Oc­to­ber, up 130,000 bpd from Septem­ber and up 2.2 mil­lion bpd from Oc­to­ber last year.

Since an­nounc­ing their in­ten­tion to cut pro­duc­tion to a range of 32.5 to 33 mil­lion bpd fol­low­ing a meet­ing in Al­giers, the dis­cord among the world’s largest ex­porters has grown. Libya, Nige­ria, Iraq and Iran have clam­oured to be ex­empt from any re­duc­tion as they re­cover mar­ket share lost to civil un­rest and, in the case of Tehran, in­ter­na­tional sanc­tions.

Those four al­ready rep­re­sent a third of OPEC out­put and an ex­emp­tion would in­crease the pres­sure on Saudi Ara­bia and its Gulf neigh­bors to de­liver the bulk of the cuts.

UP­HILL DIPLO­MACY

High­light­ing the in­creas­ingly up­hill bat­tle to achieve con­sen­sus, OPEC sources told Reuters last week that Saudi Ara­bia had warned it could raise out­put steeply if ri­val Iran re­fused to limit sup­ply.

De­spite OPEC Sec­re­tary-Gen­eral Mo­hammed Barkindo at­tempt­ing to soothe con­cerns about the group’s abil­ity to cut mean­ing­fully, oil prices are at their low­est in nearly two months, hav­ing un­wound the gains made since late Septem­ber. “The prob­lem in a nut­shell is that too many mem­bers want higher prices with­out mak­ing any sac­ri­fices and the mar­ket is los­ing pa­tience,” PVM Oil Associates an­a­lyst David Hufton said in a re­port on Mon­day.

“Con­fi­dence in a suc­cess­ful OPEC out­come has evap­o­rated.”

In­vestors have cut their net long hold­ings of crude oil fu­tures and op­tions by around 100 mil­lion bar­rels in just two weeks. An­other ques­tion hangs over non-OPEC mem­bers, specif­i­cally Rus­sia, the world’s largest pro­ducer of crude, and their will­ing­ness to join in an ef­fort to freeze or cut out­put. Rus­sia set a new post-Soviet record high in Oc­to­ber of 11.2 mil­lion bpd, un­der­scor­ing the chal­lenge the gov­ern­ment might face in agree­ing to freeze out­put.

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