The oil price structure has started to slowly shift as prompt futures premiums are softening compared to later-dated contracts, signaling that the market believes supply would be plentiful as soon as peak summer travel season ends.
The rise in supply from OPEC+ producers, as well as from Latin America and Europe, has eased the backwardation in the oil market in recent weeks, analysts and traders told Reuters on Thursday.
The backwardation structure in oil prices typically occurs when supply is tight, and in it, prices for front-month contracts are higher than the ones further out in time.
This summer, the market has been in backwardation – and still is – amid strong refinery runs globally and tighter markets for fuels, especially diesel in the United States.
But the premiums of the prompt futures compared to later-dated contracts have been falling—a sign that traders expect the rise in supply to soon ease the market tightness once demand starts to weaken after the peak summer season.
“Brent and Dubai time spreads are softening mainly on expectations of incremental OPEC+ supply from September and easing fears of Russian disruption after recent steady flows via both Baltic and Black Sea,” Dubai-based oil trader Shohruh Zukhritdinov told Reuters.
With refinery runs set to decline after September, when OPEC+ will have added more production on the market, the supply tightness will ease.
Global crude runs will approach an all-time high of 85.6 million barrels per day (bpd) in August, with annual growth of 1.6 million bpd in the third quarter, well ahead of the first-half average increase of just 130,000 bpd, the International Energy Agency (IEA) said in its monthly report on Wednesday.
However, the consensus appears to be that come September and then the fourth quarter, demand will slow and rising supply will overwhelm the market—and the oil price structure has started to flash it.
Credit: Oilprice.com
