John Kemp at Reuters, April 16:
Oil traders have become increasingly sceptical about whether the
global oil supply deal finalised on Sunday will be enough to prevent a
large accumulation of excess petroleum for the rest of this year.
Brent’s
calendar spread for the fourth quarter of 2020 has widened to a
contango of almost $2.50 a barrel in trading today, up from only $1.05
on April 3, when hopes for the forthcoming agreement were running high.
Calendar spreads, rather than spot prices, generally provide the best
insight into the expected balance between production and consumption,
though the two are loosely related (reut.rs/2RBNEzB).
Contango,
where spot prices trade below futures prices, is usually associated
with high and rising petroleum inventories. Conversely, backwardation -
the opposite of contango - is typically associated with low and falling
inventories.
Brent’s calendar spread collapsed into deep contango
in the first quarter as the coronavirus epidemic threatened economies
and a volume war erupted between Saudi Arabia and Russia until they were
persuaded to rethink as major economies went into lockdown.
The
prospect of the deal on record production cuts helped to narrow the
contango in early April, but it has flared again as traders have
digested the details of the agreement.
The continuing pressure on
Brent spreads suggests many oil traders now expect a long and deep
recession that will reduce oil consumption significantly and raise
inventories for an extended period.
PRODUCTION PROGRAMME
The
enlarged OPEC+ group of oil exporters, led by Saudi Arabia and Russia,
has agreed to cut production in May and June by 9.7 million barrels per
day (bpd) from reference levels.
Thereafter, OPEC+ will continue
with tapered reductions of 7.7 million bpd for six months to the end of
2020 and 5.8 million bpd for a further 16 months until the end of April
2022.
Russia and Saudi Arabia have agreed to implement their cuts
from the same reference level of 11 million bpd (“The 10th
(Extraordinary) OPEC and non-OPEC Ministerial Meeting concludes”, OPEC,
April 12).
OPEC+ is also assuming there will be additional
price-driven output declines worldwide, principally from the United
States, as low prices force shale producers to scale back activity.
U.S.
crude oil output is forecast to decline by about 1.75 million bpd
between March and October, acording to the U.S. Energy Information
Administration (“Short-Term Energy Outlook”, EIA, April 7).
CONSUMPTION SLUMP
Production
cuts are intended to help to offset the fall in consumption as a result
of the pandemic and lockdowns, which the International Energy Agency
(IEA) estimates will cut oil use by an average of 9.3 million bpd in
2020.
“The measures announced by OPEC+ and the G20 countries won’t rebalance
the market immediately,” the IEA warned on Wednesday, adding that it
should provide support over time (“Oil Market Report”, IEA, April 15). ....MUCH MORE
