John Kemp at Reuters, Dec. 21:
OPEC and non-OPEC oil producers
have agreed to reduce their combined output by more than 1.7
million barrels per day for six months from January 2017.
But the agreement contains a provision that it can be
extended for a further six months, subject to market conditions.
Oil traders are betting on an extension, with most of the
rebalancing of the oil market expected to occur in the second
half of 2017.
Storage tanks are expected to remain fairly full throughout
the first six months of the year and only start emptying from
June (tmsnrt.rs/2hcnjbu).
Brent time spreads, the difference between futures prices
for different months, provide an insight into how traders expect
stocks to behave.
Brent futures prices remain in a contango through the first
half of 2017, reflecting the need to cover the costs of storing
and financing large volumes of crude (tmsnrt.rs/2i0JU7A).
But the contango starts to narrow significantly around June
and disappears entirely by the end of the northern hemisphere
summer (tmsnrt.rs/2i0Jiia).
The current structure of futures prices implies it will no
longer be necessary or financially viable to store such large
volumes of crude from the third quarter onwards.
The futures price curve contains an expectation about the
state of supply, demand and the demand for storing oil.
Like any other forecast, the curve can be wrong. The oil
market could rebalance faster or slower than currently expected.
For example, traders expected stocks to start drawing down
from the middle of 2016, and instead they continued to increase.
But the curve does provide the best indication that we have
about the expected timescale for rebalancing and stock draws.
The curve implies a modest drawdown in stocks is expected
during the first half and then a much faster drawdown in the
second. The expectations appear reasonable.
The oil market will start 2017 with a high level of
inventories inherited from 2016 thanks to recent increases in
production by both OPEC and non-OPEC countries....MORE
