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Oil price structures show firm demand, depleting inventories

A sharp fall in oil inventories and optimism over a recovery in demand despite the spread of the Omicron coronavirus variant have pushed the market structure for Brent and U.S. crude into deep backwardation.

A backwardated market structure means the current value is higher than it will be in later months and encourages traders to release oil from storage and sell it promptly.

The spread of Brent for March delivery versus April delivery LCOc1-LCOc2 was 70 cents on Monday, compared to minus 10 cents on Dec 21. U.S. crude front month spread CLc1-CLc2 was around 50 cents.

“The backwardation of the oil futures curve has started widening once again, implying that prompt demand is robust,” said Jeffrey Halley, senior market analyst at OANDA.

The spread of Brent for March delivery versus September delivery LCOc1-LCOc7 was $3.81 on Monday, compared to almost $1.50 in mid-December.

“Two factors have supported the backwardation in recent quarters: The sharp drop in oil inventories since mid-2020 and OPEC+ spare capacity together with their pledge to provide more barrels down the road,” said Giovanni Staunovo, commodity analyst at UBS.

OPEC and its allies, a group known as OPEC+, agreed in early January to proceed with another 400,000-barrel-per-day (bpd) increase in output in February, suggesting the lag between actual and pledged supply could widen further without larger producers compensating for shortfalls.

OPEC+ are gradually relaxing 2020’s output cuts as demand recovers from 2020’s collapse. But many smaller producers can’t raise supply and others have been wary of pumping too much in case of renewed COVID-19 setbacks.

Brent LCOc1 traded at $83 per barrel on Friday, its highest since Dec. 24. The benchmark was around $82 on Monday.

Ole Hansen, head of commodity strategy at Saxo Bank, said robust demand and limited fallout from the surge in Omicron cases have kept oil prices steady.

He said oil has also found support with the “prospect for OPEC+ struggling to deliver the promised production hikes as several producers have started to hit their limit, some due to lack of investments.”
Source: Reuters (Reporting by Bozorgmehr Sharafedin Editing by Bernadette Baum)

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