Photographer: Kristian Helgesen/Bloomberg

Oil Curve Trades Most Bullish Since 2014, Buttressing $60 Brent

  • Key indicators surge as stocks slide, political tensions rise
  • OPEC and allies expected to rollover output cuts next month

The oil curve, a closely watched barometer of supply tightness in the crude market, is trading at its most bullish in more than three years and buttressing Brent futures’ rally through $60 a barrel.

Brent futures for December 2017 are now treading at a premium of more than $2 to those for a year later, while December 2018 futures are about $1.50 more expensive than for the same month in 2019. In both cases, the premium for the nearer contract is the biggest since early 2014, when prices were above $100 a barrel, in a sign that the traders sees supply tightening.

Surging global demand and supply cuts by some of the world’s key producers combined with simmering geopolitical tensions helped to propel Brent above $60 a barrel last week for the first time in more than two years. With the global glut shrinking, a so-called backwardated market structure has emerged that makes holding onto long positions profitable. The opposite structure, known as contango, had largely prevailed since late 2014.

“It’s not much more complicated than this: stockpiles are falling, the market is bullish,” said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd. in London. “The whole change in structure was triggered by the perception that global inventories are falling.”

The International Energy Agency, a Paris-based energy policy adviser to major economies, said earlier this month that global oil inventories are set to decline by 300,000 barrels a day this year. Global oil demand will climb the most since 2015 this year, the IEA said a month earlier. In the U.S., which provides the most frequently published inventory data, total crude and product stockpiles have shrunk by about 95 million barrels since early June.

Optimism over re-balancing has brought speculators back to the oil market, with investors boosting their bullish bets on crude by nearly 40 percent since the end of June. Traders’ outright long positions in combined Brent and West Texas Intermediate futures, the U.S. benchmark, recently rose back above one billion barrels for the second time in 2017.

“In contrast to earlier this year, a long Brent position can benefit from quite nice roll gains” with the market in backwardation, said Giovanni Staunovo, a commodity analyst at UBS Group AG in Zurich. “It reflects how much inventories fell in the third quarter.”

OPEC-Led Cuts

Just how tight the supply-demand becomes depends in part on sustained adherence to the cuts made by the Organization of Petroleum Exporting Countries and its allies. Skeptics caution that prices above $60 may tempt some producers to ease up on curbs. Still, the group’s compliance with production reductions is at a record, and the producers now seem all but certain to extend restrictions after Saudi Arabia’s Crown Prince Mohammed bin Salman last week publicly supported extending the program beyond March 2018.

The turnaround in crude’s fortunes is increasingly being reflected in major Wall Street banks’ outlooks for the commodity. JPMorgan Chase & Co. boosted its forecast for Brent in 2018 by $11 a barrel this week, while Barclays Plc, Bank of America Corp. and ING Bank NV all bolstered their near-term price outlooks in recent weeks. Goldman Sachs Group Inc. said last week that backwardation will generate investor returns of about four percent next year, while JPMorgan said the market structure should be around for a while.

“Continued stock draws and tighter market conditions are sufficient to support spot prices at close to $60/bbl and Brent markets in backwardation on average in the coming 15 months,” JPMorgan anlaysts including David Martin wrote in an emailed report.

— With assistance by Grant Smith, and Laura Hurst

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