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Bullish Forecasts Support Crude Prices

Bullish Forecasts Support Crude Prices

U.S. West Texas Intermediate crude…

Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Oil Market Could See Long Term Contango

The oil market could stay in a state of contango for longer after supply and demand finally balance due to the vast amount of crude and products in storage, Reuters reported on Friday, citing analysts and investment banks.

Contango is the state of the market in which prices for delivery at later dates are higher than prompt prices—a market situation signaling oversupply and one which traders use to store oil for delivery at a later date. 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.  

The supply and demand balance on the oil market could tip into deficit as early as in June, according to some analysts, including Goldman Sachs.

Improving global oil demand and faster-than-expected production curtailments from outside the OPEC+ pact are set to push the oil market into deficit in June, according to Goldman Sachs. Yet, there is little room for an oil price rally in the near term because of the still sizeable oversupply of crude oil and refined products, Goldman Sachs said in a note in the middle of May.

But the contango on the oil market could outlast the immediate deficit because of a high amount of oil on floating storage, according to data from Citi cited by Reuters.

“An inflection point is happening in physical fundamentals, although oil-on-water may cast a shadow on the recovery,” according to Citi.

During the ‘peak lockdown’ period when every major economy except China was under lockdown in late March and early April, the oil market was in a state of super contango. The glut was growing, storage capacity was shrinking as oil demand cratered, and on top of this, OPEC’s leader and the world’s top exporter, Saudi Arabia, was intent on further cratering the market with a supply surge, before it sat down –urged by the U.S. – to forge a new deal with Russia for record production cuts.

Since the beginning of May, demand has started to slowly recover while supply is coming off the market from the OPEC+ cuts and economics-driven curtailments in North America. But the sizable oil in storage, including floating storage for which traders have chartered tankers for at least six months, could keep the market in contango even though it could tip into deficit.

By Tsvetana Paraskova for Oilprice.com

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Leave a comment
  • Ifeanyi P. on May 29 2020 said:
    for me the recovery has not been bad for the past weeks now, there is every reason to believe the price would hits $50 in the coming weeks , most countries just started release on lockdown for movment, gasoline demand has started to loom. there is strong hope no doubt about that
  • Mamdouh Salameh on May 30 2020 said:
    What matters is that crude oil prices are headed upward underpinned by rising Chinese oil imports, accelerating easing of the global lockdown, the impact of OPEC+ cuts and the steep decline in US oil production and the need for US crude oil imports to rise from 9 million barrels a day (mbd) in 2019 to an estimated 11-12 in the next two years.

    These factors could significantly reduce inventories around the world in 2021 and push oil prices further up.

    Meanwhile, prices could be projected to hit $45-$50 a barrel during the second half of 2020 even touching $60 in early 2021.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Maxander on May 30 2020 said:
    The floating storage of close to 200 mn barrels although has been seen recently quite higher compared to earlier periods, it is not at all that huge.
    It is just 2.5 to 3 days of world oil requirement at present. That may just vanish in no time if complete lockdown of oil production for 3-4 days carried out due to coronavirus. Already there are cases of infection at rigs, oil drilling locations.
    I think there should be complete lockdown of oil production, drilling plants for atleast 1 week to avoid spreading of coronavirus infection. Otherwise, it could cost big fortune after more uncontrollable infection found at oil plants leading to complete shutdown, closure of oil production for several months.

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