At least in the European market that helps dictate global crude oil prices, bearish signals abound even as one would hear the oil market is rebalancing if listening to Saudi Arabia and the Brent is holding above $50 a barrel.
But the fact in the world of physical oil is different than on the face.
Noting the biggest discount since February, the price difference between Brent crude for delivery in two months and three months widened to minus 69 cents on Thursday. it is a yardstick telling traders how well supplied the market is. In February, the headline price for the grade was barely above $35 a barrel.
As speculators bought in after OPEC surprised traders by announcing the outline of a production cut in Algiers last month, there has been a rally in headline prices above $50 a barrel and the weakness in the so-called time-spreads for Brent contrasts with the rally.
“Any deal is still far from being completed. In the very short-term the market remains oversupplied not only by a small margin, but by a large one,” said Carsten Fritsch, commodity analyst at Commerzbank AG.
As Russia increases output, Kazakhstan’s massive Kashagan oilfield in the Caspian Sea starts pumping and as Nigeria and Libya ramp up production following sabotage, oil traders say the European and Mediterranean market is awash with crude. North Sea production is also returning from summer maintenance.
“More light-sweet crude will be making its way into the Atlantic Basin and competing with Brent,” said Harry Tchilinguirian, head of commodity markets at BNP Paribas SA in London.
Traders have been prevented from selling the European surplus into Asian markets or putting it into floating storage and long-haul shipping has been hampered by rising freight costs from summer lows and this is a further complication.
“The gloomy export outlook for Brent-related crudes to Asia is made all the more somber by the growth in crude production in the already well-supplied Atlantic Basin,” said Stephen Brennock, at brokerage PVM Oil Associates Ltd in London.
Money managers have been betting more than ever that oil prices will increase and the weakness in physical markets comes at such a time.
West Texas Intermediate combined rose to their highest level in data going back to 2011 last week and speculative net bullish, or long, positions in Brent.
Before Brent futures for December expire at the end of the month, the glut of crude in the physical market may spur some investors to shun those long positions. Traders will have to accept some losses to buy January contracts that are trading at a higher level, a condition called contango, if they want to maintain those positions.
Olivier Jakob, head of consultant Petromatrix GmbH, said that speculators “now have to decide to either take profit” or “roll into a widening contango to maintain length into the next OPEC meeting” on Nov. 30.
Nigeria, where production is returning after months of disruptions, is perhaps the biggest challenge for speculators. Up from a three-decade low of 1.39 million barrels a day in August, the West African OPEC country is expected to pump this month about 1.7-1.8 million barrels a day.
(Adapted from Bloomberg)