Oil price curve may hint at higher prices at last

Cautious oil market bulls are stirring, sensing higher prices for future months after a first whisper that the glut may be set to slowly shrink.

The International Energy Agency (IEA) on Friday said lower prices will force non-OPEC producers including the United States to cut output by the steepest rate in over 20 years next year.

This helped push the difference in price between oil for delivery in October and for delivery in one year’s time to its widest in six months, at $8.0 a barrel on Monday.

“People are getting ready to press the ‘buy’ button, but the thing is we are probably just still a couple of months too early,” Saxo Bank commodities strategist Ole Hansen said.

The outperformance of longer-dated crude prices seems to be more about a pickup in the future prospects for the market, than gloom over the immediate outlook.

“Over the past week, most of the movement has happened has been a positive move at the back end of the curve, so a story like the (IEA) one on Friday does obviously help,” Hansen said.

The contango, or discount, between immediate delivery of oil and delivery in a year is around half of what it was at the height of the financial crisis in 2008, but is well above long-term averages.

In the last 10 years, the one-12 months contango has averaged $1.07 a barrel. Over the last 20 years, this gap has held on average at -$0.43 a barrel – meaning it was in the opposite market structure known as backwardation.

Benchmark Brent crude futures have halved in price in the last 12 months to below $48 a barrel.


In part, the steepening of the curve this year has been the product of fierce pressure on near-term Brent crude futures , which fell in late August below $43 a barrel to their lowest since early 2009.

Since then however, the price has risen by 5 percent, fund managers have steadily upped their bullish bets on crude oil, completing their largest three-week increase in five years last week.

BNP Paribas global head of commodity strategy Harry Tchilinguirian told the Reuters Global Oil Forum on Monday that he and his team, who are forecasting an average Brent price of $62 in 2016, did not buy the “lower for longer” story for oil.

“We think we are near the floor, but nothing precludes that we temporarily move lower,” he said.

“Now, a couple of data points does not make a trend, but rig count for oil is down for a second week,” he said. “Once this trend becomes entrenched in the high-frequency weekly data, the market will regain its bullish footing.”

Jodie Gunzberg, global head of commodity indices at S&P Dow Jones Indices, said the steeper contango was unlikely to reverse any time soon.

“We’re seeing the increase in contango and gloom because we have the largest excess inventories in history and that can’t change overnight,” she said.

Gunzberg, who does not issue price forecasts, said historically, once a term structure is in place, there have only been 15 months out of 343 where that has briefly switched. Arabian Business