TIGHT OIL PRICES
Brent futures prices are signalling the market expects a rapid tightening of the supply-demand balance in the second half of 2016.
The spread between futures prices for oil delivered in June and July has moved into a backwardation of 17 cents per barrel from a contango of almost 50 cents at the end of last month.
Contango tends to be associated with an oversupplied market and high and rising stocks, while backwardation is associated with the opposite.
The rapid tightening of the June-July spread can be put down to a series of short-term output disruptions, tanker loading delays and now the oil workers' strike in Kuwait, which have combined to cut near-term crude availability.
Beyond July, the futures price curve remains in contango, but there too the market shows signs of tightening, with the contango narrowing sharply in recent weeks and months.
The spread between July and August Brent has shrunk to just 23 cents contango, from 84 cents in early February.
The spread between August and September has narrowed to less than 20 cents contango, from 75 cents in early February.
A similar narrowing of price spreads is evident throughout the rest of the year and in the futures strip for 2017.
The spread for the whole of calendar 2017 has shrunk from a recent low of $5.17 contango to just $2.35 contango.
The shrinking contango has coincided with a rush of commentaries from oil analysts predicting the crude oil market is now well on the way to rebalancing.
Non-OPEC oil production is declining rapidly while consumption, especially gasoline, continues to grow strongly, particularly in the United States, India and China.
At the same time, many hedge funds have established "long" positions in the spread in anticipation of market rebalancing by buying a near-dated futures contract and selling one further forward.
Long positions in the spread, rather than a simple outright long position in the spot price, are favoured by more sophisticated speculators.
Spread positions eliminate much of the short-term noise and cross-market contamination which influences spot prices, at least in theory.
Hedge fund long positions in the timespreads are not easy to identify in the published data, though they are likely to be substantial.
But outright hedge fund positioning in Brent hit a record net long position of 403 million barrels on April 12, just before the Doha summit.
Hedge funds had amassed an overall net long position in Brent and WTI derivatives amounting to 608 million barrels, the highest since July 2014, when the oil slump began.
Hedge funds are more bullish about the outlook for oil prices than at any time since the crash started almost two years ago. Some of that bullishness is likely to have spilled over into the timespreads.
Disentangling how much of the tightening in the spreads is down to an actual changing of the supply-demand balance as opposed to speculators' expectations of a changing balance is impossible.
Many influential oil analysts are convinced both spot prices and the spreads have risen too far too fast in recent months and are vulnerable to a correction.
The enormous concentration of hedge fund positions in WTI and especially Brent suggests the market could be ripe for a pull back in the short term.
Some analysts predicted that the failure to reach agreement on a production freeze at the oil ministers' meeting in Doha on Sunday would provide the trigger for a correction.
Instead oil prices steadied after an initial sharp selloff and are now higher than before the meeting began, suggesting that many market participants do not think the meeting's failure materially changed the outlook.
For the time being, the market is shrugging off the debacle in Doha and is positioned for an anticipated rebalancing of supply and demand in the second half of the year and accelerating in 2017.
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