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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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Extreme Backwardation Suggests One Of The Tightest Oil Markets Ever

  • Oil futures are seeing the steepest backwardation in data going back to 2007, suggesting we are witnessing one of the tightest oil markets ever.
  • While oil prices fell on Thursday morning due to rumors of an Iran nuclear deal coming to fruition, the near-term oil market will remain very tight.
  • The price of Dated Brent physical cargoes traded in the North Sea hit $100.80 per barrel on Wednesday, the first time Brent exceeded $100 since 2014.
Backwardation

The oil futures curve is in such an extreme backwardation that it suggests the oil market is very tight right now, despite Thursday’s move lower after Iran said that a possible nuclear deal was “closer than ever.”

Brent oil prices fell early on Thursday to below the $93 mark, after Iran’s main negotiator, Ali Bagheri Kani, tweeted late on Wednesday:

“After weeks of intensive talks, we are closer than ever to an agreement; nothing is agreed until everything is agreed, though. Our negotiating partners need to be realistic, avoid intransigence and heed lessons of past 4yrs. Time for their serious decisions.”

In case a deal is indeed reached – and the U.S. has said that the window of reaching an agreement is closing fast – Iran could return some 1.3 million barrels per day (bpd) to the market within several months after the U.S. lifts sanctions on its oil exports.

This, of course, is still in the realm of possibility, but the immediate signals reflected in the futures prices are shouting that the market has rarely been so tight.

Some of the futures spreads are in their steepest backwardations in data going back to 2007, according to Bloomberg.

The price of Dated Brent, physical cargoes traded in the North Sea, hit $100.80 per barrel on Wednesday. That was the first time Dated Brent has exceeded the $100 a barrel threshold since September 2014. The jump in physical cargo prices suggests that traders are willing to pay $100 per barrel for actual crude supply right now in a sign of a very tight market, Bloomberg notes.

“The only way to balance this market over the medium term remains high oil prices to slow demand growth,” analysts at Energy Aspects wrote in a note to clients cited by Bloomberg.

Meanwhile, crude stocks at Cushing, Oklahoma—the designated delivery point for WTI Crude oil futures contracts—dropped by another 1.9 million barrels, to stand at just 25.8 million barrels as of February 11—the lowest level since 2018. 

By Tsvetana Paraskova for Oilprice.com

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  • Mamdouh Salameh on February 17 2022 said:
    With the tightest oil market in years and with global oil demand in its most bullish state since 2014 and having already entered a super-cycle phase which could last for ten years and take Brent crude oil beyond $120 a barrel in the next few years, high oil prices are here to stay as long as the super-cycle lasts.

    The incessant pressure on the oil industry to divest of its oil and gas assets and on banks not to extend investment loans to the oil industry abetted by the IEA’s discredited net-zero emissions 2050 roadmap calling for the immediate halting of any new investments in oil and gas and the EUs hasty policies to accelerate energy transition at the expense of fossil fuels have all translated into a shrinking global spare oil production capacity, a steep decline in global oil and gas investments and an accelerating decline in global oil inventories all leading to the current surge in crude oil prices.

    If this situation continues unabated, a damaging global energy crisis could be in the offing reminiscent of 2008.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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