OPEC and Russia might like to take all the credit for oil’s recovery with their plan to freeze production. Futures prices show that’s not the whole story.
While much of the 30 percent rally in Brent crude futures over the past two months has stemmed from the producers’ dialogue, a diminishing contango — where oil for short-term delivery is cheaper than later shipments — shows that markets are also feeling the loss of supplies from a number of areas, from the North Sea to Nigeria and Iraq.
The front-month Brent contract, June, is trading at a premium to the subsequent month for the first time since January, a condition known as backwardation that typically signals short-term supplies are being strained by demand. It encourages refiners to process barrels straight away, rather than compound any glut by piling them into storage.
“Brent is flirting with backwardation because of supply outages in Nigeria and North Sea field maintenance,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London. “At best, the Doha meeting is aiming to maintain the status quo in supplies. But these outages are ultimately more important, as they effect a change in the oil balance.” Read more