Kemp: Feast Or Famine? Oil Market In 2018
(John Kemp is a Reuters market analyst. The views expressed are his own)
LONDON, Oct 10 (Reuters) - “Behold, there come seven years of great plenty throughout all the land of Egypt: and there shall arise after them seven years of famine; and all the plenty shall be forgotten.”
In the Bible, Joseph was interpreting Pharaoh’s dream of seven fat and seven thin cows, but he might have been talking about the oil market (“Genesis”, chapter 41, verses 29-30).
Just as Pharaoh’s kingdom experienced a cycle of feast and famine, depending on the Nile inundation, the oil market swings between periods of undersupply and oversupply.
“The problem of oil is that there is always too much or too little,” as Myron Watkins, professor of economics at New York University, wrote 80 years ago (“Oil: stabilization or conservation?” Watkins, 1937).
Ancient Egypt’s food supply was alternately plentiful or scarce, but only rarely “just enough”, which is why the state had granaries to store excess from the good harvests to cover the poor ones.
The oil market, too, carries stocks from periods of oversupply to periods of undersupply, and cycles regularly from contango to backwardation as it does so.
The natural state of the oil market is not just enough, any more than the natural state of Pharaoh’s food supply was just enough.
OPEC and other commentators, including myself, characterise the process of restricting oil production and reducing excess stocks as one of market “rebalancing”.
But while rebalancing is useful shorthand for a complicated set of adjustments to production, consumption and stocks, it does not imply the process ends with a “balanced” oil market.
The oil market is rarely balanced, and never for very long.
In the past, periods of oversupply and contango were swiftly followed by a return to undersupply and backwardation (http://tmsnrt.rs/2zcg3BC).
Something similar appears to be underway at present, with Brent and other international crude grades moving into backwardation over the last three months, after trading in contango since the middle of 2014.
Most analysts have expressed concern about the re-emergence of oversupply, a renewed rise in crude stocks, and how OPEC and its allies will exit from their current production deal in 2018.
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