Oil Futures Market Finally Signals Supply Tightening

• The oil futures market has strengthened, suggesting that a market tightening may be on its way.
• Sparked by cut announcements from both Saudi Arabia and Russia, spreads in oi derivatives markets have started to show strength.
• In recent days, prompt spreads have strengthened, swaps contracts linked with physical supply have surged, and the premium of bearish puts over bullish calls has narrowed.

The oil futures market has strengthened this week, signaling that a market tightening could be on the way.    

Following the latest announcements of fresh supply cuts from OPEC+ leaders Saudi Arabia and Russia, key spreads in the oil derivatives markets have started to show strength, according to Bloomberg’s estimates.

Prompt spreads in the futures market have returned to backwardation, from contango. 

Contango is the state of the market in which prices for delivery at later dates are higher than front-month prices—a market situation signaling oversupply. The opposite market situation—backwardation—typically occurs at times of market deficit, and in it, prices for front-month contracts are higher than the ones further out in time.   

Last week, the six-month spread in Brent flipped to contango for the first time since December 2022, after being in backwardation for months. The U.S. benchmark, WTI Crude, also dropped into contango on June 27, for the first time since March.  

But in recent days, prompt spreads have strengthened, swaps contracts linked with physical supply have surged, and in options markets, the premium of bearish puts over bullish calls has narrowed.

On Monday, Saudi Arabia and Russia announced nearly at the same time fresh cuts to global oil supply.

Saudi Arabia said it would extend its unilateral oil production cut of 1 million bpd into August. Saudi Arabia will be producing around 9 million bpd in both July and August after extending the voluntary cut into next month.

“This additional voluntary cut comes to reinforce the precautionary efforts made by OPEC Plus countries with the aim of supporting the stability and balance of oil market,” Saudi Arabia said.

Minutes after the Saudi announcement, Russia’s Deputy Prime Minister Alexander Novak said that Russia would cut its crude oil exports by 500,000 bpd in August in a bid to ensure a balanced market.

By Tsvetana Paraskova for Oilprice.com

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