The latest Investing Matters Podcast with Jean Roche, Co-Manager of Schroder UK Mid Cap Investment Trust has just been released. Listen here.
LONDON, June 22 (Reuters) – Brent prices and spreads indicate the oil market is close to balance – with upside risks from low inventories and supply restraint by Saudi Arabia and its OPEC⁺ allies offset by downside risks from a slowing global economy.
The prolonged calm has disappointed producers as well as investors hoping output cuts announced by OPEC⁺ in early April and an extra voluntary cut by Saudi Arabia announced in June would quickly push prices higher.
In the physical market, dated Brent prices are in contango through the rest of June and July, indicating traders expect plenty of crude to be available.
The spread in dated prices between July and August ended nearly flat on June 21, down from a backwardation of as much as 64 cents per barrel on April 12.
The spread between August and September was still in a backwardation of 34 cents per barrel, but that was half the backwardation of 70 cents reported in April, as concerns about a possible shortage have lessened.
The front-month spread is in the 50th percentile for all months since the start of the century, implying production and consumption are close to balance.
The second-month spread is firmer, in the 66th percentile, but still implies the market is expected to tighten only gradually in the third quarter.
Chartbook: Brent prices and spreads
On the financial side, the same pattern is visible, with the futures spread from August to September slumping to a contango of 2 cents from a backwardation of as much as 70 cents in April.
The spread for the whole of the fourth quarter is in a backwardation of less than $1 down from $2 in April, implying any tightening is expected to be gradual.
Turning from spreads to outright prices, front-month futures closed at $77 on June 21, in the 45th percentile for all days since the start of the century, after adjusting for inflation.
Real prices are only slightly below the long-term average of $81, confirming production and consumption are expected to be roughly in balance for the rest of the year.
Percentage daily price moves have been moderate over the last month, with annualised volatility of 34% in the 67th percentile, only a little above the long-term average of 29%.
Eye Of The Storm?
Like many financial equilibria, this one may prove fragile.
Global petroleum inventories are well below the long-term average, especially for refined fuels such as diesel and gas oil.
If the global economy avoids recession and resumes steady growth, low inventories could quickly put explosive upward pressure on prices and spreads.
But the outlook for the economy and petroleum consumption has deteriorated since the start of the year, which has dampened any bullishness for now.
Persistent inflation in North America and Europe is keeping upward pressure on interest rates, threatening a longer and deeper slowdown in manufacturing and freight demand.
At the same time, expectations about a strong rebound in the economy and oil consumption in China
Arthur. Your stupidity is alarming and I can only hope that if you leave the house (children’s home) you are never allowed out on your own.
ALL oilers are down as a result of Brent being in backwardation in the futures market because of a price balance being achieved by opec cuts, Saudi voluntary cut in production aligned with a drop in potential demand because of Chinese economic policy.
Instead of spouting crap, try learning the basics……
@achance. So so Tragic. For someone “living it up” you still spend time being a peni5 by posting in here. Such a sad person. I really do have pity for you. Have you considered professional therapy?
Hi again. I can’t believe that RD would put his own money in to the share market expecting bad news just to make us feel better when any bad news lands..,..,I wouldn’t!
No, he has done it because he and the rest of the board are highly confident for the first time in 3 years that good news is us indeed imminent. I bet my left nut on it x
Hello Anton. I don’t mind why they did it that way; just glad they have and even more so as I topped up again just a couple of weeks ago. Hopefully, the long wait for another decent run up in the price is upon us all x
Morning all. For those that remember, I used to suffer from a debilitating condition that caused a mild discomfort in my left spherical on a daily basis. However, I divorced Mrs B and it went away BUT I do have the return of an itch. Things feel like they’re about to get going so good luck all x
@Aber. I am not so sure it was a B&ISA as the spread seems too wide between the two prices. When I did my last £20k B&Isa I lost 46 shares in “costs”, not 150. Either way, it’s all positive stuff and as £1.40 is being paid for shares now we should see another tick up I guess?
Gla and thanks to the informed for informing us uninformed ones. X