Oil futures and swaps globally are increasingly showing signs of easing supply concerns and resurfaced concerns about further weakness in crude oil demand.
The prompt spreads in the U.S. benchmark, WTI Crude, are already in contango, signaling enough near-term supply. Brent Crude front-month to second-month futures prices also dipped into contango earlier this week.
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.
Another oil market metric closely followed for signs of demand in the key oil-importing region, Asia, is the premium of Oman futures over Dubai swaps. That premium dropped on Thursday to below $1 per barrel – compared to a premium of over $15 a barrel in March this year – signaling much softer demand. The premium has fallen by around 80% in November alone, according to Bloomberg’s estimates.
So far this month, oil prices have dropped amid growing fears of economic slowdown and spiking Covid infections in China, where some forms of restriction on mobility have returned in nearly 50 large cities.
China is registering near-record numbers of new Covid infections daily—close to the April 2022 peak when the financial center Shanghai was under lockdown for weeks—likely depressing fuel demand as 48 Chinese cities currently have some form of restrictions on movements.
According to analysts at Nomura, as of Monday, areas accounting for almost 20% of China’s GDP were suffering from the latest Covid restrictions. China’s rising Covid cases and the return of restrictions have weighed on oil prices this month as the market fears another slowdown in Chinese economic growth and fuel demand, on top of global recession fears.
By Irina Slav for Oilprice.com
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Also if that is true then why Brent crude hasn’t dropped to $68-$74 a barrel, the range of prices that President Biden wants to refill his SPR?
While oil market metrics like contango or a decline of the premium of Oman futures over Dubai swaps could be signalling weaker demand, this isn’t borne out by realities in the market.
1- A decline of global oil inventories this year to 442 million barrels far below their five-year average.
2- OPEC+’s expectation that global oil demand this year will overtake 2019 demand level by 1.41 million barrels a day (mbd) rising to 101.78 mbd compared with 100.37 mbd for 2019. Moreover, global oil demand in 2023 is projected to hit 103.0 mbd.
3- And despite rising COVID cases in China, Chinese diesel exports have nearly doubled in October from a year earlier to reach 32.67 million barrels (mb) and they are expected to hit 44.76 mb in November or 37% higher than October. This signals rising crude oil imports proportionately.
4- China’s energy imports from Russia between February and November this year amounted to $60 bn or 71% higher than the same period in 2021.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert