LONDON: Oil traders have become much more sanguine about the availability of crude over the last month, taking some of the heat out of oil prices following Russia’s invasion of Ukraine.
On the consumption side, China’s fuel use has faltered as more areas have been put into lockdown to control coronavirus outbreaks, and there have been early signs of a cyclical downturn in the United States and Europe.
On the production side, Russia’s oil exports have continued at a reduced level despite the threat of sanctions.
Meanwhile, the United States and its allies have offered an unprecedented volume of strategic stocks to the market if needed.
Both supply and demand, therefore, look much more comfortable than they did a month ago.
This is accompanied by a more stable outlook for global inventories and prices.
Reflecting that greater comfort level, Brent’s front-month futures contract closed at US$98 (RM414.42) per barrel on April 11, roughly the same level as prior to the invasion on Feb 24.
More importantly, Brent’s calendar spreads have softened significantly and are now trading below pre-invasion levels.
Calendar spreads are closely associated with expectations about the future production-consumption balance and inventories.
Backwardation – when nearby prices are higher than for more distant contracts – is normally associated with under-production and low/falling inventories, while contango –the opposite – is associated with over-production and high/rising inventories.
In the futures market, Brent’s six-month spread has eased into a backwardation of just US$3 (RM12.69) per barrel, in the 85th percentile for all trading days since 1990.
But the backwardation has softened from a record of more than US$22 (RM93.03) on March 8 and is below the immediate pre-invasion level of US$8 (RM33.83).
The same softening of calendar spreads is evident in the more short-term market for physical cargoes in dated Brent.
Dated Brent’s five-week calendar spread has moved into a small contango from a record backwardation of almost US$8 (RM33.83) in early March. — Reuters
