Oil market shows investors don’t quite buy OPEC’s production plan

Futures structure now trading at its largest contango since July

Turkish President Tayyip Erdogan (center), and his Russian counterpart Vladimir Putin (center left) attend a family picture at the ceremony to mark the completion of the sea part of the TurkStream gas pipeline, in Istanbul, on Nov 19. (AFP) LONDON, Nov 19, (RTRS): The oil price has recovered from last week’s battering, ostensibly soothed by the possibility that OPEC and its partners could cut production to prevent another global surplus from forming.

But the futures market shows investors remain unconvinced that such a plan will work.

The January Brent futures contract is trading at a discount to the February contract, a pricing structure known as contango that reflects a perception among traders and investors that oil supply will be greater than demand.

The oil price fell nearly 5 percent to below $65 a barrel last week.

Seeking to prop up prices, producer club OPEC and rivals such as Russia and Oman partnered in January 2017, agreeing to cut crude output by a combined 1.8 million barrels per day to drain an overhang of unused crude and refined products.

The output restrictions forced stocks to fall and pushed the futures market into backwardation, a structure in which near-term futures trade above those for delivery further ahead and which reflects a belief that supply will fall short of demand.

Backwardation persisted for most of 2017 and half of 2018, until the Organization of the Petroleum Exporting Countries and its partners agreed to raise output to counter any shortfalls from US sanctions aimed at choking off Iranian production.

Since then OPEC, led by Saudi Arabia, has struggled to persuade the market that it can indeed maintain the balance between supply and demand. The futures structure is now trading at its largest contango since July, which in turn was the largest for a year.

Fast-growing output from producers over which OPEC has no influence, such as the United States, threatens to tilt the market into surplus for the whole of 2019, according to estimates from the International Energy Agency.

The physical markets, where actual barrels of oil change hands, are groaning under the weight of oversupply and prices for some types of crude are at multi-year lows, as is the case for North Sea Forties, which is instrumental in determining the benchmark dated Brent price.

As a result, fund managers have cut their record-high bets on a sustained rally in Brent and West Texas Intermediate crude futures by 50 percent in just eight weeks to the lowest since mid-2017.

Any stray bulls out there are, for now, laying low.