OPEC supply management yet to work as producer group intended
Brent is benchmark for more than half the world’s crude oilThe Brent physical oil market is flashing signs of weakness again as dwindling Asian purchases, an influx of American crude to Europe, and supplies flowing out of storage all combine to recreate a glut in the North Sea.
The weakness comes at a time when speculators have started rebuilding bullish positions after a sell-off last month, betting the market will tighten in the second quarter. Yet, Brent physical oil traders say the opposite is happening so far, according to interviews with executives at several trading houses, who asked not to be identified discussing internal views.
“We need to see the market going really into deficit for oil prices to rise,” Giovanni Staunovo, commodity analyst at UBS Group AG in Zurich, said. “If this is temporary, it could be weathered, but it needs to be monitored.”
The weakness is particularly visible in so-called time-spreads -- the price difference between contracts for delivery at different periods. Reflecting a growing surplus that could force traders to seek tankers as temporary floating storage facilities, the Brent June-July spread this week fell to an unusually weak minus 55 cents per barrel, down from parity just two months earlier. The negative structure is known in the industry as contango.
"Keep a wary eye on the Brent contango," said Jan Stuart, energy economist at Credit Suisse Securities LLC in New York. "Bellwether Brent time-spreads have been counter-seasonally widening.”
In the world of contracts for difference, which allow traders to insure price exposure for their North Sea crude shipments week-by-week, the one-week CFD spread plunged this week to minus $1.84 a barrel, the weakest since late November and just before the Organization of Petroleum Exporting countries and allied nations announced their first joint effort to manage supply in over a decade. A month ago, the comparable CFD traded at just minus 50 cents barrel.
"It will not take much before we see headlines about floating storage starting to increase again," said Olivier Jakob, head of oil consultant PetroMatrix GmbH, in Zug, Switzerland.
Weaker differentialsThe differentials between physical grades and benchmarks have also weakened in recent weeks. Glencore Plc, the world’s largest commodities trader, on Thursday bought from French oil giant Total SA a cargo of Brent crude at $1 a barrel below the main North Sea benchmark, the widest discount in 22 months, according to a trader monitoring deals.
Oil traders said OPEC was initially successful, driving oil prices higher and tightening time-spreads. But the group was a victim of its own success, as those same spreads forced crude out of storage, flooding an already weaker physical market with supply. Higher headline prices also boosted U.S. shale producers.
Among the factors behind the weakness, traders cited muted demand in Asia, saying Chinese independent refiners -- known as "teapots" -- have dramatically reduced buying after strong imports earlier this year.
Lastly, tighter time-spreads in late February and early March forced some crude out of storage, particularly from onshore tank-farms in the Caribbean and Saldanha Bay in South Africa, flooding the market, the traders said.
As the physical market for Brent weakens, Saudi Arabia said on Thursday that some oil producers have reached a tentative agreement to extend the current round of output cuts. Russia, which joined OPEC earlier this year in lowering production, said it was too early to say whether a roll-over will be needed.
“There is an initial agreement that we might be obligated to extend to get to our target," Khalid Al-Falih, the Saudi energy minister, told an oil conference in Abu Dhabi.
OPEC and several other producers including Russia, Mexico and Kazakhstan agreed in December to reduce production by about 1.8 million barrels a day -- the first OPEC and non-OPEC deal in more than a decade -- in an effort to counter an oversupply weighing on prices. The producer group meets again May 25.
"OPEC will need to take action at the next meeting in order to provide some kind of oil-price support," said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd. in London.
Hoy es el día más hermoso de nuestra vida, querido Sancho; los obstáculos más grandes, nuestras propias indecisiones; nuestro enemigo más fuerte, el miedo al poderoso y a nosotros mismos; la cosa más fácil, equivocarnos; la más destructiva, la mentira y el egoísmo; la peor derrota, el desaliento; los defectos más peligrosos, la soberbia y el rencor; las sensaciones más gratas, la buena conciencia, el esfuerzo para ser mejores sin ser perfectos, y sobretodo, la disposición para hacer el bien y combatir la injusticia dondequiera que esté.
MIGUEL DE CERVANTES
Don Quijote de la Mancha.
MIGUEL DE CERVANTES
Don Quijote de la Mancha.
20 de abril de 2017
The Real World of Oil Has a Warning for Financial Markets