Column: Oil prices signal a more balanced supply-demand outlook

A gas pump is inserted inside an Audi vehicle at a Mobil gas station on Beverly Boulevard in West Hollywood, California, U.S., March 10, 2022. REUTERS/Bing Guan/File Photo

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LONDON, April 12 (Reuters) – Oil traders have become much more optimistic about the availability of crude over the past month, easing some of the pressure on oil prices after China’s invasion of Ukraine. Russia.

On the consumption side, China’s fuel consumption weakened as more areas were quarantined to control coronavirus outbreaks, and there were early signs of a cyclical slowdown in the United States and in Europe.

On the production side, Russia’s oil exports have remained at a reduced level despite the threat of sanctions, while the United States and its allies have offered the market an unprecedented volume of strategic stocks in case of need. .

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Supply and demand therefore look much more comfortable than a month ago, with a more stable outlook for global stocks and prices.

(Book of maps: https://tmsnrt.rs/3uzLvZt)

Reflecting this heightened level of comfort, Brent’s first-month futures contract closed at $98 a barrel on April 11, about the same level as before the February 24 invasion.

More importantly, Brent calendar spreads have softened significantly and are now trading below pre-invasion levels.

Calendar spreads are closely linked to expectations concerning the future production-consumption balance and stocks.

Forwarding – when near prices are higher than for more distant contracts – is normally associated with underproduction and low/falling inventories, while contango – the reverse – is associated with overproduction and high/rising inventory.

In the futures market, Brent’s six-month spread narrowed to a pullback of just $3 a barrel, in the 85th percentile for all trading days since 1990.

But the forward has eased from a record high of over $22 on March 8 and is below the immediate pre-invasion level of $8.

The same easing in calendar spreads is evident in the shorter-term Brent dated physical cargo market.

Brent’s dated five-week calendar gap moved to a small contango after a record low of nearly $8 in early March.

The five-week spread is now only at the 42nd percentile for all trading days since 2010, down from a record high as recently as March 10.

As a result, dated Brent is now trading at a discount to first-month futures, having been at a premium of over $8 in March.

Traders still expect the global balance between production and consumption to remain tight and inventories to remain low this year.

But fears of an immediate crude shortage diminished as the prospect of an immediate embargo on Russian exports receded and oil continued to flow.

The unprecedented offer by the United States and other members of the International Energy Agency to put 240 million barrels of strategic reserves on sale over the next six months has also reassured traders that there will be no immediate shortage.

The supply acted like a giant spread trade, weighing down nearby prices while supporting those further ahead, flattening calendar spreads.

At the same time, upside price risks related to a possible disruption of Russian exports have been offset to some extent by downside price risks related to the coronavirus outbreak in China and deteriorating macroeconomic conditions. in the world.

The more balanced distribution of risk has calmed some of the frantic buying that accelerated the spike in prices and calendar spreads in late February and early March.

The oil market is back to its pre-invasion state – with low inventories and concerns about further tightening, but no panic.

Associated columns:

– Funds sell oil as economic weakness trumps sanctions (Reuters, April 11) read more

– Hedge funds grapple with triple oil uncertainty (Reuters, April 4) read more

– White House uses oil reserve to place giant spread operation (Reuters, April 1) Read more

– Cooling Chinese economy dampens commodity prices somewhat (Reuters, March 31) read more

John Kemp is a market analyst at Reuters. Opinions expressed are his own.

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Editing by Mark Potter

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust.


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Felix J. Dixon