(John Kemp is a Reuters market analyst. The views expressed are
* Chart 1: tmsnrt.rs/2mLRatT
* Chart 2: tmsnrt.rs/2mLFPtL
By John Kemp
LONDON, March 28 Progress towards oil-market
rebalancing and the need for an extension of production cuts by
OPEC and non-OPEC countries has become the most contentious
issue in the oil market.
"We believe that the rebalancing of the oil market is in
fact making progress despite the record high U.S. crude
inventories," Goldman Sachs analysts said in a note to clients
Goldman expects oil stocks in the OECD to fall to the
five-year average in terms of demand cover by the end of 2017,
even if OPEC brings production back on line in the second half.
Goldman projects crude prices will move into backwardation
and an extension of the cuts would exacerbate the feared
shortfall in supplies. ("Data dependent OPEC unwise to let the
stock draws run hot", Goldman Sachs, March 26)
The bank says an extension would not be warranted and would
ultimately be self-defeating if it pushed prices towards $65 per
barrel and caused an even-faster recovery in oil drilling.
Goldman is one of the most influential banks in the oil
market and among the hedge-fund community so the view of its
respected research team carries considerable weight.
But the bank's confidence in rebalancing during the second
half of 2017 without an extension of the production deal puts it
in a minority.
Most traders have become much less sure the market will
enter a persistent period of undersupply with a sharp reduction
in oil inventories.
Brent calendar spreads for the six months between June and
December have weakened sharply over the last four weeks (tmsnrt.rs/2mLRatT).
The calendar spread between June and December has shifted
from a backwardation of 21 cents on Feb. 21 to a contango of 92
cents on March 27.
Contango is generally associated with a well-supplied market
and high and/or increasing stocks, while backwardation is
associated with an undersupplied market and low and/or falling
The calendar spread for the second half of 2017 is now
trading at the widest contango since OPEC's deal was announced
on Nov. 30.
The weakening of the spreads has not been concentrated in
any particular month, with price differentials easing for every
month during the second half (tmsnrt.rs/2mLFPtL).
The spreads have become the prime battleground for hedge
funds and other traders betting on the timing and speed of oil
Brent and WTI spreads seem to have attracted heavy interest
from some big players in the market at the end of 2016 and the
first two months of 2017.
But after a selloff that started after Feb. 21, the current
Brent futures price structure is in something of a no-man’s
Calendar spreads are barely wide enough to finance high
levels of stocks through until the end of December but do not
point to a fast draw down in stockpiles either.
From recent movements in the futures curve, many oil traders
appear to believe the cuts need to be extended, and are unsure
if that will happen, or if it will be enough.
If Goldman is right, however, the calendar spread for the
second half of 2017 is currently undervalued and should
strengthen significantly, so it presents a good buying
If Goldman is wrong, and stocks remain high with or without
an extension of the agreement, then most of the inter-month
spreads are likely to weaken further as they near maturity to
enable the stocks to be carried.
(Editing by Susan Fenton)