Traders Expect Much Tighter Oil Markets In Early 2018

Optimism among oil traders seems to be rising based on Brent calendar spreads, according to Reuters market analyst John Kemp. He notes in a recent column that said spreads have begun moving from contango to backwardation, with the spreads for November to December 2017 and for January to February 2018 already in backwardation.

What's more, Kemp says, the Brent inter-month spreads for the rest of 2018 look flat for the time being, suggesting that traders expect a tighter oil market. Supporting this belief, the Brent spread for the first half of that year is in backwardation. That is the first time this has happened since the start of the oil price crash, three years ago.

According to Kemp, the futures/spot market spreads say a lot about traders' expectations for the future state of a commodity's fundamentals and the way these look now suggests traders are expecting a more balanced market next year and even possibly a consistent decline of global crude inventories.

These expectations come amid a bulky weekly increase in U.S. oil inventories resulting from refinery shutdowns because of Hurricane Harvey and the possibility of further disruptions as three more major storms gain strength in the Caribbean and the Gulf of Mexico.

At the same time, media have this week reported that Russia and Saudi Arabia are considering another extension of the November 2016 crude oil production cut agreement that was supposed to help markets rebalance by taking 1.8 million bpd from global supply. Related: Oman To Become A Key Part Of China's Silk Road

While the deal has not lived up completely to the promise to sending crude oil benchmarks to US$60 (or higher), data about production and exports seems to support a gradual decline in global supplies. Still, they remain above the five-year average that's used to gauge whether the market suffers from excess supply or has returned to balance.

Some observers are warning that the production cut path is not the best one for OPEC's biggest producers and that returning to maximum production is the better option over the longer term. Should Saudi Arabia decide to make such a U-turn, for which there are no indications at the moment, more OPEC producers will follow its example and traders would have to kiss backwardation goodbye.

By Irina Slav for Oilprice.com

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