Tuesday, December 27, 2016

"Brent curve signals oil tanks will start emptying in second half of 2017"

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