Oil traders bet on economic upswing in 2020: Kemp

LONDON: Crude oil traders are betting the market will tighten significantly next year, even as the major statistical agencies predict production will outstrip consumption and oil inventories will rise. Most of the divergence can be explained by differing assumptions about global growth in 2020.

The International Energy Agency (IEA), the US Energy Information Administration (EIA) and the Organization of the Petroleum Exporting Countries are all projecting that the oil market will be in surplus in 2020. Each of the three agencies is forecasting that non-OPEC oil supplies will increase around 1 million barrels per day (bpd) faster than global oil consumption next year. The three agencies are also forecasting non-OPEC production growth of 2.2-2.4 million bpd while consumption increases by only 1.1-1.4 million bpd.

If these forecasts are correct, the result will be a significant rise in stocks of crude and refined products, unless OPEC members and their allies reduce their own output even further. But the shape of the crude futures curve suggests traders and hedge funds are instead anticipating a drawdown in stockpiles next year. Brent’s six-month calendar spread has tightened to a backwardation of around $3.50 per barrel, up from less than $1.90 at the same a month ago and a contango of $1.10 this time last year.

Backwardation (where spot prices trade above futures prices) is normally associated with low/falling inventories, while contango (spot prices trading below futures) is typically associated with high/rising stockpiles. —Reuters