Crude oil traders expect the oil market to begin contract and gradually move into deficit, however, the shift is not forecast to occur much before the second half of 2017.
The expected timetable for rebalancing is revealed by the changing relationship between Brent futures prices for different months in 2017 and 2018, Reuters reveals.
Traders’ expectations about the balance between supply, demand and stock levels are reflected in the shape of the futures price curve.
If supply is expected to exceed demand, and stocks are high and rising, futures prices will normally trade in a structure called contango, with prices for nearby delivery dates below those for later delivery months.
Discounts for nearby delivery months reflect the cost of financing and storing excess stocks until they can be resold and consumed at a later date.
But if demand is expected to exceed supply, and stocks are low and falling, futures prices will normally trade in the opposite structure, known as backwardation, with nearby prices above those for later delivery.
The premium for nearby delivery months helps make more supplies available immediately and discourages short-term consumption to conserve stocks for future use.
In the oil market, changes in the balance between supply and demand have usually been closely associated with changes in the structure of Brent futures prices over the last two decades (tmsnrt.rs/2h6AZks).
Periods of oversupply, such as 1997/98, 2008/09 and now 2014/16, have been associated with a progressive shift into contango.
Periods of rebalancing and stock draws, such as 1999/2000 and 2010/11, have been associated with a progressive shift towards backwardation.
Futures prices are driven by expectations about future supply and demand, so they are a best guess, not an infallible forecast.
OPEC’s agreement to cut 1.2 million barrels per day from its members’ production starting in January 2017 triggered a sharp rally last week in Brent time spreads for all periods in 2017 and 2018 (tmsnrt.rs/2gnIVQ0).
Traders anticipated the planned cuts by the Organisation of the Petroleum Exporting Countries, OPEC, would reduce global oil supplies and lead to a drawdown in stockpiles in 2017.
