Oil Rebalancing: Delayed Rather than Derailed?

 

Brent futures prices for June delivery have risen in 10 of the last 11 trading sessions by a total of more than $5 per barrel.

 

Brent has now recovered all its previous losses after the sell that began on March 8 and continued through March 23.

 

In contrast to the recovery in flat prices, Brent calendar spreads have remained weak and showed no signs of strengthening.

 

The calendar spread between Brent for delivery in June and December 2017 has remained in an overall contango of 82 cents per barrel.

 

Brent spreads for the second half of 2017 have not tightened significantly and remain well below the peak set in February.

 

However, the overall spread weakness conceals very different performance for different months within the second half.

 

Spreads for June and July have continued to weaken while spreads later in the year have been strengthening in recent sessions.

 

Calendar spreads have become the major battleground among traders about the timing of any draw down in crude stocks.

 

Hedge funds built record long positions in both flat prices and calendar spreads between December and February anticipating an early rebalancing and move into backwardation.

 

In the event, the positions proved premature, contributing to a sharp correction in spreads (from late February) and flat prices (from early March).

 

But believers in rebalancing mostly think that the movement to backwardation has been postponed rather than aborted.

 

Most traders still anticipate a draw down in crude stocks this year but now think it will be evident in late summer and autumn rather than spring.

 

The repositioning of tightness within the spreads is consistent with the evolving views of prominent hedge fund managers.

 

“I think the market will switch to backwardation, sustainable backwardation, by late summer,” fund manager Pierre Andurand said late last month.

 

Andurand has been one of the most prominent oil bulls, forecasting supply would fall short of demand (“One of the world’s best-known oil traders is predicting prices to recover to $70 a barrel”, CNBC, March 31).

 

Goldman Sachs, one of the most influential banks in commodities, and another spread bull, has also counselled traders to be patient (“Patience is working, but reflation requires time”, April 12).

 

Goldman forecasts “a relatively steep level of backwardation later this year” driven by “expected inventory draws in the second quarter that we remain confident in”.

 

Goldman is restating a position it has articulated for some time (“Goldman takes on the Brent spreads”, Reuters, March 28).

 

The recent strengthening of both flat prices and spreads for later in the year indicates the view is a popular one.

 

Crude inventories in the United States have continued to rise since the start of the year, which has contributed to doubts about progress towards rebalancing.

 

But reported stocks in the United States and elsewhere in the OECD may be rising because previously hidden stockpiles are being moved to more visible locations.

 

OPEC’s production cuts have started to drain crude stocks from floating storage as well as tank farms in the Caribbean and South Africa (“OPEC’s war on oil overhang starts to bear fruit”, Reuters, April 11).

 

Producer stocks held by Saudi Arabia and Iran have drained into the market where they have become more visible (“Saudi Arabia tries to drain oil stocks while protecting customer relationships”, Reuters, March 23).

 

Crude stocks look like they are being moved forward along the supply chain closer to the major consumption centres ready to be delivered to refiners.