Kemp: Oil Futures Show No Sign Of Market Tightening Despite OPEC Talks

Kemp: Oil Futures Show No Sign Of Market Tightening Despite OPEC Talks
If OPEC hopes to speed up the rebalancing of the oil market by announcing a production-limiting plan, someone should tell the futures market.

Reuters

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

LONDON, Nov 22 (Reuters) - If OPEC hopes to speed up the rebalancing of the oil market by announcing a production-limiting plan, someone should tell the futures market.

Front-month futures have risen sharply in recent days amid rising expectations OPEC will reach some sort of agreement by the next ministerial meeting on Nov. 30.

Front-month Brent is up by around $5 per barrel, or more than 10 percent, from its recent low on Nov. 14, amid positive chatter from oil ministers and officials.

Much of the rise in prices appears to be the result of a classic short-covering rally as hedge funds close out some of the large short positions they established over the previous three weeks.

But the sudden strengthening of spot prices is at odds with the continued weakness evident in the futures price curve (http://tmsnrt.rs/2fNEnCG).

The futures strip remains mired in contango and shows none of the strength that would indicate traders expect the market to tighten over the next six months.

The shape of the futures curve is usually closely related to traders' expectations about physical oil production, consumption and inventories.

In the past, a tightening of the supply-demand balance and a drawdown in stocks have been accompanied by a gradual shift from contango to backwardation (http://tmsnrt.rs/2gc3xaP).

But the futures curve shows no sign of an expected drawdown in stockpiles this time around. In fact, the contango has been widening rather than narrowing consistently since the end of April.

If oil market rebalancing were expected over the next few months, the contango should be narrowing not widening.

And if an OPEC deal was expected to accelerate the process, the contango should be narrowing even more quickly.

Instead, the wide contango points to continued oversupply and no drawdown in stocks for the foreseeable future.

The contango for the first six futures months is actually now wider (around $3.90 per barrel) than at the time of the OPEC meeting in September (around $2.70) when the outlines of a production deal were announced.


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