Global Oil Market - October 31

[dan_s]

Global Oil Demand exceeds Supply by 1.0 to 1.5 million barrels per day.

COLUMN-Oil market set to move from rebalancing to tightening: Kemp - Reuters News
30-Oct-2017 09:26:48

John Kemp is a Reuters market analyst. The views expressed are his own

By John Kemp

LONDON, Oct 30 (Reuters) - The oil market is now well into a cyclical upswing and within the next year the narrative about “rebalancing” is likely to be replaced by one about “tightening”.

Rebalancing started well before the production pact between the Organization of the Petroleum Exporting Countries (OPEC) and its allies went into effect in January.

OPEC has been open about the fact that the rebalancing process pre-dated its agreement, with officials repeatedly noting the accord was intended to “accelerate” a process that was already underway.

The spot price of Brent has been rising since January 2016 and the six-month calendar spread has been increasing since January 2015 (http://tmsnrt.rs/2gVoCMK).

Depending on which turning point is used, the rebalancing process has already been underway for 21 months (spot prices) or 32 months (spreads).

Like any rebalancing process, adjustment is barely perceptible at first, which is why the turning point is often missed, but tends to accelerate over time.

The current rebalancing started with an acceleration in global oil consumption, which was already evident in the first half of 2015 in response to lower prices.

Oil production did not decelerate until 2016, because of the lags in the system, and OPEC’s own output restraint did not start until 2017.

But with consumption now running faster than production the market is steadily whittling away the excess inventories accumulated in 2015/2016.

During the last two rebalancing processes, after oil slumps in 1998/99 and 2008/09, front-month Brent prices took roughly 21 months and 26 months respectively to reach their first major peak.

Meanwhile, the calendar spread took 21 months and 34 months respectively to reach its first cyclical peak after each episode.

The recent slump was in some ways deeper, and the recovery has certainly been more prolonged, but it can no longer be described as being in its early stages.

The current rebalancing process is already therefore fairly mature and at some point in the next six to nine months will be more accurately described as tightening.

The Brent spread has already shifted decisively from contango to backwardation and is well within the upper-half of its historical range, pointing to a market that is undersupplied and drawing down stocks.

According estimates from the OPEC/non-OPEC Joint Ministerial Monitoring Committee, OPEC is more than halfway to its declared target of reducing OECD oil inventories to their five-year average.

Excess stocks have been draw down by 180 million barrels since the start of 2017, although they are still 160 million barrels above the 2012-2016 average.

In practice, stocks at the five-year average would probably prove uncomfortably low given the big increase in oil demand since 2012.

Well before the five-year average is reached, spot prices and spreads will rise to move the market from production restraint/consumption growth to production growth/consumption restraint.

In this context, the increase in front-month Brent futures prices above $60 per barrel on Friday, for the first time since July 2015, and tightening of the calendar spread to its highest on a sustained basis since July 2014, is consistent with a market transitioning from rebalancing to tightening.

John Kemp
Senior Market Analyst
Reuters

[dan_s]

"Despite continued rampant bearishness, global oil demand continues to significantly exceed
supply and global inventories are now drawing at record rates. Back in January, our models told us
the energy analytic community was significantly underestimating demand. We wrote, “the world oil
markets will end up severely under-supplied by over 600,000 b/d during 2017.” At the time, few in
the energy analytic community agreed with anything we wrote. However, a funny has happened as
2017 has progressed. After a brief build in January and February, oil and product inventories (both
here in the US and globally) have in fact drawn down by 500,000 b/d since March – very much in line
with what we predicted. As Chart 1 vividly shows, we are now drawing down global inventories at
the fastest rate ever experienced. Readers of our letters will be familiar with the drivers of this rapid
drawdown: global oil demand is surging, while non-OPEC oil supply (both here in the US and abroad)
is disappointing (subjects we have extensively discussed in previous letters)."
- Goehring & Rozencwajg Associates, Natural Resource Investors Newsletter dated 10/20/2017

See: https://www.linkedin.com/feed/update/ur ... 1146497024

[dan_s]

WTI backwardation coming.
Reuters argues that falling U.S. oil inventories are a sign of a shift towards backwardation for WTI, a state in which near-term oil contracts trade at a premium to longer-dated oil futures. With Brent already in a state of backwardation, the downward sloping futures curve for WTI would be another signal that the oil market is tightening. Backwardation tends to appear during periods of market tightening and would suggest higher oil prices are possible.