• 4 hours Midwestern Refiners Seek Canadian Oil To Expand Output
  • 9 hours UK On Track To Approve Construction of “Mini” Nuclear Reactors
  • 13 hours LNG Glut To Continue Into 2020s, IEA Says
  • 15 hours Oil Nears $52 With Record OPEC Deal Compliance
  • 18 hours Saudi Aramco CEO Affirms IPO On Track For H2 2018
  • 20 hours Canadia Ltd. Returns To Sudan For First Time Since Oil Price Crash
  • 21 hours Syrian Rebel Group Takes Over Oil Field From IS
  • 3 days PDVSA Booted From Caribbean Terminal Over Unpaid Bills
  • 3 days Russia Warns Ukraine Against Recovering Oil Off The Coast Of Crimea
  • 4 days Syrian Rebels Relinquish Control Of Major Gas Field
  • 4 days Schlumberger Warns Of Moderating Investment In North America
  • 4 days Oil Prices Set For Weekly Loss As Profit Taking Trumps Mideast Tensions
  • 4 days Energy Regulators Look To Guard Grid From Cyberattacks
  • 4 days Mexico Says OPEC Has Not Approached It For Deal Extension
  • 4 days New Video Game Targets Oil Infrastructure
  • 4 days Shell Restarts Bonny Light Exports
  • 4 days Russia’s Rosneft To Take Majority In Kurdish Oil Pipeline
  • 4 days Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 4 days British Utility Companies Brace For Major Reforms
  • 5 days Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 5 days Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 5 days Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 5 days OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 5 days London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 5 days Rosneft Signs $400M Deal With Kurdistan
  • 5 days Kinder Morgan Warns About Trans Mountain Delays
  • 5 days India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 5 days Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 6 days Russia, Saudis Team Up To Boost Fracking Tech
  • 6 days Conflicting News Spurs Doubt On Aramco IPO
  • 6 days Exxon Starts Production At New Refinery In Texas
  • 6 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 7 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 7 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 7 days China To Take 5% Of Rosneft’s Output In New Deal
  • 7 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 7 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 7 days VW Fails To Secure Critical Commodity For EVs
  • 7 days Enbridge Pipeline Expansion Finally Approved
  • 7 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
Alt Text

Is The Aramco IPO On The Brink Of Collapse?

Conflicting news suggests that Saudi…

Alt Text

Russia Goes All In On Arctic Oil Development

Fighting sanctions and low oil…

Alt Text

Who Are The Biggest Buyers Of U.S. Oil?

Exports of U.S. petroleum and…

Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

More Info

As OPEC Compliance Peaks, Can The Drawdowns Continue?

OPEC

Since it agreed to production cuts, OPEC stated that its mission is to see the oil futures curve flip from contango to backwardation as part of its work to erase the global oil glut. Since summer began, the contango is disappearing, and now Brent and Oman futures are in a state of backwardation for the rest of 2017 and for 2018, but OPEC’s work is far from over.    

Contango, a market situation in which the spot prices are lower than future prices, encourages traders to store crude oil and profit from selling it at prices higher than the spot market. Crude oil stores are precisely what OPEC is trying to do away with. Backwardation, contango’s opposite, was one of OPEC’s key goals with the output cuts—discouraging the storage of crude oil and driving oversupply down.

It looks like OPEC has accomplished one of its goals: flipping from contango to backwardation. Global inventories have dropped lately, and to further boost sentiment, global oil demand growth is strong expected to remain so for the year.  

But as we exit the peak demand summer months and enter the months leading to OPEC’s end-November meeting, OPEC’s current victory lap—that it constantly reminds the public of—may look a bit premature. Will the drawdown continue at a pace sufficient to eliminate oversupply and boost oil prices? The jury is out, and speculation’s rising about what OPEC would or should do after the production cut deal expires after its current deadline in March 2018. Related: Can Oil Prices Hit $60 In 2018?

Currently, the Brent and Oman futures contracts are trading in backwardation for 2017 and 2018, while the WTI futures curve is still in contango, albeit a narrower one than before the cuts took effect, Reuters columnist John Kemp writes.

Last week, OPEC praised itself for achieving the highest compliance rate since the cuts began. While the market has stopped reacting to the conformity levels the cartel is boasting, OPEC noted that commercial oil stocks have reduced at a fast pace.  

“Commercial oil stocks in the OECD fell further in August and the difference to the latest five-year average has been reduced by 168 million barrels since the beginning of this year; however, there remains another 170 million barrels of stock overhang to be depleted. Supported by the improving forward structure in the futures market, floating storage has also been on a declining trend since June,” OPEC said.

As in previous statements, the cartel continues its refrain: All options are still on the table.

In his opening remarks at Friday’s meeting of the OPEC/non-OPEC panel that is supervising the cuts, Kuwait’s Oil Minister HE Issam Almarzooq said:

“We have also witnessed a distinct change in the market structure over the past couple of months, initially with a narrowing contango and more recently when Brent flipped into backwardation. This we believe is a sign of the shrinking stockpiles, as well as stronger demand.”

Earlier this month, the International Energy Agency (IEA) noted that global oil demand grew very strongly year-on-year in the second quarter and revised up its forecast for oil demand growth for 2017 to 1.6 million bpd from 1.5 million bpd.   

Currently, not only is demand growth seen as strong, but the futures curve and OPEC’s cuts are also leading to a tighter market, and traders are said to be selling crude that they had stockpiled at Saldanha Bay in South Africa. Total, Vitol Group, and Mercuria Energy Group have started emptying storage, Bloomberg reports, citing people familiar with the matter.

“Backwardation is going to increase a bit,” Mercuria’s CEO Marco Dunand told Bloomberg in a recent interview.

Related: Expect A Major Leap In U.S. Oil Exports

“We are seeing a reduction in global inventories, although we can see another build-up in the first quarter of next year,” Dunand noted.

The first quarter of 2018 is the last quarter in which OPEC’s cuts would be in effect, if the cartel doesn’t extend or deepen production reductions. At that time of the season, demand is lower than in the summer, and ending the cuts in March—ahead of peak demand—could exacerbate the glut that OPEC and friends have been fighting this year.

By Tsvetana Paraskova for Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News