Oil Market Is Set To Become Very Tight Later This Year

Brent Crude futures prices for later this year suggest that the oil market is undersupplied, despite recent rises in U.S. crude oil inventories that sent spot oil prices plunging in the past two days, Reuters market analyst John Kemp argues.

Although U.S. commercial crude oil inventories have been rising in recent weeks, they have been doing so less than normal for this time of the year although U.S. refineries have been undergoing heavy spring maintenance to be ready to process fuel in the fall and winter of 2019, just ahead of the new low-sulfur requirements for shipping fuels, Kemp writes.

Oil prices plunged on Thursday to the lowest in a month after U.S. government data showed on Wednesday that inventories hit their highest since September 2017 and production soared to another record level last week.

Analysts and the market interpreted the increase in inventories and the record-high U.S. crude oil production as suggesting that the market may be well-supplied.

However, the Brent Crude futures prices are now in a steep backwardation-the market situation in which front-month prices are trading at a premium compared to prices further out in the future-a sign of a tighter and undersupplied market.

Futures prices between July and December are trading at a backwardation of more than $2.70 per barrel-a sign that traders expect the market to be very tight in the second half of 2019, according to Kemp. Related: Saudi Arabia, UAE "Draw The Death And Collapse Of OPEC"

When the U.S. refinery maintenance ends and refineries begin full production ahead of the summer driving season, crude oil inventories are likely to decline quickly, leading to a tighter market, Kemp says. That is, unless oil demand deteriorates going forward or Saudi Arabia ramps up production significantly.

The July/August Brent time spread continues to strengthen, while the flat price weakened on Thursday, Warren Patterson, Head of Commodities Strategy at ING, said on Friday.

"The Jul/Aug spread continues to move into deeper backwardation, with the spread trading as high as US$0.78/bbl this morning, up from US$0.61/bbl on Tuesday. This spread strength does suggest that the spot physical market continues to tighten," Patterson noted.

By Tsvetana Paraskova for Oilprice.com

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