October 27, 2020

Headache for OPEC as oil market construction alerts return of glut



By Shu Zhang, Florence Tan and Dmitry Zhdannikov

Singapore/London: Rising OPEC and U.S. oil provide, coupled with stalled financial and crude demand restoration, have pushed the futures market construction again to indicating a surplus, final noticed throughout oil’s collapse in April and Might amid the coronavirus pandemic.

The event is a headache for OPEC, which had been hoping demand would get better faster after a spherical of document international output cuts. The group will both have to contemplate additional manufacturing cuts or tolerate decrease oil costs for longer.

The excess market construction, when immediate costs are weaker than future costs, can be a boon for merchants, as they’ll retailer crude within the hope to resell it later at a revenue. Royal Dutch/Shell, Complete, Eni and Norway’s Equinor have all reported bumper buying and selling income over the previous week.

Entrance-month September Brent futures prior to now week have been buying and selling at a reduction of $2 per barrel to March 2021, the steepest low cost since Might, when lockdown measures towards the virus outbreak lower international oil demand by a 3rd.

The construction is called contango and often signifies a direct oil surplus and hopes for a requirement restoration in future months. The other construction is called backwardation.

“OPEC’s experiment to extend manufacturing from August might backfire as we’re nonetheless nowhere close to out of the woods but by way of oil demand,” stated Bjornar Tonhaugen, Rystad Power’s Head of Oil Market Analysis.

“The market will flip again right into a mini-supply glut and a swing into deficit is not going to occur once more till December 2020.”

OPEC didn’t reply to a request for remark.

Howie Lee, economist at Singapore’s OCBC financial institution, stated the market was unconvinced demand was recovering and as a substitute was selecting to purchase additional down the curve at a rising premium.

File coronavirus an infection and demise charges in the US and another components of the world are stoking fears {that a} new virus wave might additional hit demand.

Many change traded funds have been additionally spreading their lengthy positions extra equally throughout the curve after some asset managers have been badly burnt by April’s adverse expiry of U.S. front-month WTI crude futures, Lee stated.

Brent spreads have traditionally been a great proxy for the worldwide production-consumption stability in addition to inventories

Bodily Crude Weak spot

The bodily oil market can be weakening.

Money Dubai and DME Oman costs on Tuesday flipped into reductions to Dubai swaps for the primary time since end-Might on account of weak demand together with from China. Dubai August/September inter-month spreads additionally flipped from backwardation into contango in late July.

Abu Dhabi, Iraqi and Qatari grades all fell to identify reductions to their official promoting costs and a few cargoes are nonetheless hanging unsold, in line with three Asian merchants.

Demand from high purchaser China softened on account of weak margins, extended port congestion, extreme flood and restricted crude import quotas, a number of China-focused merchants have stated.

In Europe, rising U.S. exports are additionally miserable spot bodily costs.

“U.S. producers are bringing again wells they’d beforehand shut… Given the disappointing demand, it raises the chance that the market returns to constructing inventories,” stated Warren Patterson from ING.

U.S. crude exports have risen to three.2 million barrels per day final week, the best since mid-Might. A lot of the U.S. manufacturing curtailments within the spring got here from shale wells that have been choked again however not shut-in utterly.

WTI at Midland, Texas, the center of the Permian basin, this week slid to commerce at a reduction to benchmark futures as curtailed volumes returned to the market, merchants stated.

“The market is most actually feeling the consequences of the China shopping for ending after the large shopping for seen over the previous few months,” stated Scott Shelton from United ICAP.