Despite recent signs of weakening oil demand as Europe grapples with a new wave of COVID cases, the crude oil futures market structure still points to demand beginning to outpace supply in the second half of 2021, analysts tell Reuters.
The front-month spread of the Brent Crude futures prices flipped to contango in March, pointing to weaker demand and an oil oversupply in the immediate term.
Last week, the nearest Brent Crude contract for May was trading at a discount to the next-month contract, the June contract, for the first time since January this year. The contango—the structure in which the front-month price is lower than prices in future months—points to an oversupply on the market. Only the nearest contract was in contango, but the weakness in the backwardation in recent days has exacerbated concerns over near-term oil demand.
Early on Wednesday, the May contract continued to trade in a $0.15 a barrel contango versus the June contract. Related: Will 2021 Mark The Start Of A Major Shale Recovery?
However, the remaining contracts further out on the futures curve remain in backwardation, the state of the market signaling tighter supplies with prompt prices higher than those further out in time. The six-month Brent spread, the difference between the May and November contracts, is still in a deep backwardation of over $2 a barrel, which, analysts say, continues to point to the oil market rebalancing in the second half of this year with demand starting to exceed supply.
Analysts at Energy Aspects remain bullish on the prospects of oil demand recovery in the second half of the year, despite the recent build-up of inventories amid renewed lockdowns in major European economies.
“We remain bullish (on) summer crude prices and spreads,” Energy Aspects told Reuters.
Demand has been weaker in recent weeks, with lockdowns in Europe and signs emerging from the physical market that spot oil demand was not as strong as oil futures prices had suggested.
By Tsvetana Paraskova for Oilprice.com
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Moreover, the recent slowdown in the impressive surge in oil prices since December last year is due to concerns over major European economies bringing back lockdowns.
The prices will soon resume their surge led principally by China and also the recovering US economy.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London