Global Oil Market: The View from London on June 4
Posted: Tue Jun 04, 2019 10:07 am
Comments below are from John Kemp at Reuters. John is based in London, so most of the time he is speaking about Brent oil prices.
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In the last month, Brent spot prices and calendar spreads have been sending seemingly contradictory signals about the outlook for the oil market in the second half of the year.
Slumping spot prices since late April have indicated traders are concerned about the market becoming oversupplied and a big build in inventories.
In contrast, six-month calendar spreads surged deeper into backwardation, implying traders are worried about undersupply and a further drawdown in stocks.
Much of the concern about production is concentrated in nearby months, while the outlook further forward is dominated by fears about consumption.
Spread tightness was concentrated in July-August futures and reflected concerns about availability, while Russia's exports remain disrupted by pipeline contamination and North Sea platforms undergo maintenance.
As the July contract expired and the six-month spread rolled forward to August-February, the backwardation shrank sharply from more than $4 per barrel to less than $2 and has come under further pressure.
Spot prices and spreads must eventually converge. So far, that convergence is coming from a softening of the spreads pointing to greater concern about consumption rather than production in the second half of the year.
Traders are increasingly concerned a potential slowdown in consumption growth could leave the market oversupplied later in the year, unless shale output slows further and OPEC+ extends production cuts.
Spot prices and spreads are moving to enforce an adjustment to slower production growth, just as they did in the fourth quarter of 2018.
RECESSION IS COMING < Keep in mind that this "FEAR" will reverse if Trump and negotiate a trade agreement with China. - Dan.
Consumption concerns stem from a bigger fear about a sharp slowdown in the global economy that could ripple through the freight transportation and manufacturing sectors to hit oil demand.
Recent economic indicators show manufacturing activity and freight movements around the world flat-lining or falling after strong growth in 2017 and 2018.
Recession risks are the highest since the Great Recession of 2008/09 and are already higher than before the recessions of 1991 and 2001, according to the New York Fed's yield-curve model.
U.S. interest rate traders now expect the Federal Reserve to cut interest rates by almost three-quarters of a percentage point by the start of 2020, according to futures markets. < If the Fed does cut interest rates the stock market should rally. - Dan.
The OECD's leading economic indicator has fallen to its lowest for almost a decade and is at a level that since 1970 has always signalled an imminent recession.
In China, the world's largest oil importer, manufacturers have reported a significant loss of momentum since the middle of 2018 and business activity has fallen in four of the last six months.
As a result, oil prices have tumbled to adjust to the increased risk of a recession biting into expected consumption later in the year and early 2020.
If the risk of recession recedes, oil prices will rise again, but for the moment traders are sending a signal to Saudi Arabia and U.S. shale producers on the need to curb output growth in the face of a likely economic slowdown.
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In the last month, Brent spot prices and calendar spreads have been sending seemingly contradictory signals about the outlook for the oil market in the second half of the year.
Slumping spot prices since late April have indicated traders are concerned about the market becoming oversupplied and a big build in inventories.
In contrast, six-month calendar spreads surged deeper into backwardation, implying traders are worried about undersupply and a further drawdown in stocks.
Much of the concern about production is concentrated in nearby months, while the outlook further forward is dominated by fears about consumption.
Spread tightness was concentrated in July-August futures and reflected concerns about availability, while Russia's exports remain disrupted by pipeline contamination and North Sea platforms undergo maintenance.
As the July contract expired and the six-month spread rolled forward to August-February, the backwardation shrank sharply from more than $4 per barrel to less than $2 and has come under further pressure.
Spot prices and spreads must eventually converge. So far, that convergence is coming from a softening of the spreads pointing to greater concern about consumption rather than production in the second half of the year.
Traders are increasingly concerned a potential slowdown in consumption growth could leave the market oversupplied later in the year, unless shale output slows further and OPEC+ extends production cuts.
Spot prices and spreads are moving to enforce an adjustment to slower production growth, just as they did in the fourth quarter of 2018.
RECESSION IS COMING < Keep in mind that this "FEAR" will reverse if Trump and negotiate a trade agreement with China. - Dan.
Consumption concerns stem from a bigger fear about a sharp slowdown in the global economy that could ripple through the freight transportation and manufacturing sectors to hit oil demand.
Recent economic indicators show manufacturing activity and freight movements around the world flat-lining or falling after strong growth in 2017 and 2018.
Recession risks are the highest since the Great Recession of 2008/09 and are already higher than before the recessions of 1991 and 2001, according to the New York Fed's yield-curve model.
U.S. interest rate traders now expect the Federal Reserve to cut interest rates by almost three-quarters of a percentage point by the start of 2020, according to futures markets. < If the Fed does cut interest rates the stock market should rally. - Dan.
The OECD's leading economic indicator has fallen to its lowest for almost a decade and is at a level that since 1970 has always signalled an imminent recession.
In China, the world's largest oil importer, manufacturers have reported a significant loss of momentum since the middle of 2018 and business activity has fallen in four of the last six months.
As a result, oil prices have tumbled to adjust to the increased risk of a recession biting into expected consumption later in the year and early 2020.
If the risk of recession recedes, oil prices will rise again, but for the moment traders are sending a signal to Saudi Arabia and U.S. shale producers on the need to curb output growth in the face of a likely economic slowdown.