Oil Markets Point to a Lasting Glut of Crude
A closely watched market indicator shows supply is expected to dwarf demand in the coming months
Energy markets are flashing a warning: The world is swimming in crude oil, and the glut won’t drain away any time soon.
Twin shocks—the coronavirus pandemic and the breakdown of Russia’s partnership with the Organization of the Petroleum Exporting Countries—threaten to flood the market with cheap oil at a time when demand is falling.
That has caused the relationship between oil prices at different dates, a closely watched barometer of the balance between supply and demand, to indicate a severe surplus of oil is imminent. On Thursday it cost around $31 to buy a barrel of Brent crude for next month, $8 less than it cost to buy a barrel for April 2021.
This gauge was last as extreme in early 2015, when oil production was soaring in the U.S.
“This is a once-in-history demand shock being met by a once-in-a-generation supply shock going the other way,” said Saad Rahim, chief economist at commodities trader Trafigura. “This virus is directly affecting travel and movement in a way we’ve not really seen before.”
Global oil inventories will expand by nearly 1.4 billion barrels between March 2020 and August 2021, analysts at Standard Chartered estimate. This number of barrels contains enough oil to fill 88,000 Olympic swimming pools, which would stretch from New York to San Francisco if they were lined up in a row.
Oil prices took another hammering Thursday, after President Trump Wednesday announced a 30-day ban on some travel from Europe into the U.S. Brent-crude oil, the global benchmark, dropped 6.7% to $33.37 a barrel, while U.S. crude futures fell 6.1% to $30.98 a barrel. Both benchmarks have lost almost half their value in 2020.
“Markets are screaming for OPEC not to flood the markets,” said Hakan Kaya, who manages commodity investments for Neuberger Bermann. “The signal is loud and clear to OPEC and U.S. producers: just don’t bring the additional barrels of crude oil—it’s not needed.”
The change in pricing of oil in futures markets represents a major shift into what traders call contango, in which traders can buy cheap oil today and lock in a higher price for selling at a later date. Buyers and sellers of oil use futures, a type of contract, to lock in prices, protecting them against swings that take place between signing a deal and exchanging the crude.
“The textbook reason for why you get this steep contango is that you have to incentivize people producing oil to store the oil now, as opposed to sending it out into the market,” said Michael Haigh, head of commodities strategy at Société Générale.
The shifting structure of the oil market is likely to create new winners and losers.
Shipowners are one possible beneficiary. The cost of chartering vessels used to transport crude has surged, pushing the Baltic Dirty Tanker index up 38% this week.
“What we have started to see is owners pricing in the risk of freight rates moving up and the potential for floating storage too,” said Claire Grierson, head of tanker research at shipping brokers Simpson Spence Young.
If the gap between near-term and long-term prices remains as wide as it was this week, companies with large physical trading operations such as Trafigura Group and Vitol Group could also make easy money.
Get a Monday morning jolt of insight and analysis on the global energy business, with our Energy Journal newsletter. Sign up.
The oil market has been struggling with excess supply since long before the outbreak of the coronavirus. OPEC cut its forecast for demand growth in a monthly report this week, the seventh time it has done so in the space of 10 months.
“Even in December, we knew that this year’s supply was going to overrun demand,” said Marwan Younes, chief investment officer at Massar Capital Management, a New York-based hedge fund. “It’s gone from bad, to very bad, to extraordinarily bad.” he said.
Saudi Arabia and Russia have both said they would open their spigots when the agreement to cut production expires on April 1. Investors say the gap between oil prices at different dates could continue to widen when the consequences of those decisions become more apparent in the actual physical movement of oil around the world, according to Richard Fullarton, chief investment officer at Matilda Capital Management, a London-based hedge fund.
No comments:
Post a Comment