Yesterday (Tuesday), the IEA upped its supply outlook for non-OPEC producers an extra 220 Mbbl/d from last month’s estimate. Led by Soviet-era (or as Putin calls it, "the good old days") production levels from Russia, as well as increased output from Canada and the UK, non-OPEC production is expected to average 52 MMbbl/d this year.
Consequently, the IEA lowered its ‘call on OPEC’ by 200 Mbbl/d. The producer group need only provide an average of 28.8 MMbbl/d to balance global supply and demand. The IEA places the group’s compliance rate to its self imposed production ceiling at 55 per cent. That places OPEC’s daily production (exclusive of Iraq) around 26.7 MMbbl/d. With Iraq, OPEC’s total output is currently estimated at over 29 MMbbl/d.
In this vein, the contango in both the London and New York crude oil markets has slipped. Whereas a month ago the front-month Brent contract was trading at a 57 cent (-0.7%) discount to the next contract, at the beginning of this week the spot contract for May, which expires tomorrow, traded at a 94 cent discount (-1.1%) to the June.
Similarly for WTI, over the last four weeks the 1st/2nd month spread has steepened from a 30 cent (-0.4%) to a 94 cent (-1.1%) discount. Thus, as the curve steepens the incentive to build storage increases, vis-à-vis opportunities for cash-and-carry arbs. Nevertheless, oil prices remain strong… counter to the structure of the forward curve for Brent and WTI.
A contango for a consumption commodity is the clearest signal available that the market is comfortable with the balance between supply and demand. A contango that steepens is a sign that the market is concerned with too much product available on the spot market. As such, it pays you to take those barrels off of the spot market and put them into storage. In other words, it is a stark bearish fundamental metric.
Be that as it may, investors in the City and on Wall Street continue to pile funds into oil, thereby propping up spot prices. What’s more, as we see in the Chart of the Day in today’s issue of , artificially high crude oil prices put real pressure on the ability of refiners to make money.
Stephen Schork is the Editor of and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.