November 7, 2016 / 9:12 PM / a year ago

U.S. oil futures forward structure reflects doubt over OPEC restraint

By Jessica Resnick-Ault and Devika  Krishna Kumar
    NEW YORK, Nov 7 (Reuters) - The forward curve for U.S. crude
oil futures has steepened in recent days as worries that
proposed OPEC supply cuts won't hold, or even materialize,
turned the market's outlook for 2017 deliveries more bearish
relative to longer-term contracts. 
    With the Organization of the Petroleum Exporting Countries
dragging out negotiating the terms of a production cap, traders
are now betting that a supply glut that has depressed crude
prices this year will take longer to alleviate than previously
anticipated, due to disagreements among OPEC members. 
    This is reflected in the prices for all futures months
comprising the forward structure for West Texas Intermediate
(WTI) crude, which is the U.S. benchmark, while Brent crude is
the global benchmark.
    The 2017 calendar strip, representing an average
price of the 12 contracts expiring during the year, fell to a
two month low of $47.81 on Friday as squabbling seemed to return
after the countries agreed tentatively in September to limit
output. On Oct. 10 the 2017 strip reached its highest in more
than eleven months at $54.28. 
    Meanwhile, the 2018 strip dropped on Friday to
its lowest since September 2, but has not sold off as much,
holding just above $50 a barrel.
    Front-month U.S. crude futures on Friday closed at
$44.07 a barrel, the lowest since Sept. 20 and down 16 percent
from a 15-month high near $52 a barrel in October. On Monday,
the contract settled at $44.89 per barrel.
    Friday's fall came after Reuters reported that Saudi Arabia,
the world's largest crude exporter said it would boost
production if OPEC rival Iran did not agree to limits.
 
    This could increase pressure on U.S. oil producers, who have
expanded drilling programs for next year, betting on higher
prices, said Vikas Dwivedi, global oil and gas strategist at
Macquarie. 
    "I'm a little bit concerned with the way market structure
has been moving the past couple of days," said Michael Cohen,
oil analyst at Barclays.
    Prices for crude delivered in December 2017 are lower than
futures for December 2018 CLZ7-Z8, a structure known as
"contango." The differential increased to its widest since late
September at $1.89 on Friday. On Oct. 11 that spread was its
narrowest since late June at 77 cents.
    The December 2016 discount to December 2017 CLZ6-Z7
increased to $5.20 on Friday, the biggest on record. 
    Saudi Arabia has increased output since 2014 to record highs
of around 10.5 million-10.7 million barrels per day and if it
increases production in the absence of a deal, that would only
worsen the global glut. 
    So, $40 a barrel for front-month futures is seen as a
growing possibility for January. Open interest in $40 put
options - contracts essentially betting on the price falling
further - maturing in Jan rose to a record high last
week. 
    The market's balance, and consequently the outlook for U.S.
producers, continues to depend upon an OPEC agreement at the end
of November. Until then, and since many U.S. producers have
locked in hedges that allow them to continue production through
2017, traders expect that oversupply may continue to weigh on
the market.
    "If no agreement is reached I sense the market will lose
more confidence and we could have prices dip into $40 or below
by the end of the year," said one broker in the U.S. crude
market.
    OPEC Secretary-General Mohammed Barkindo on Monday
reiterated the cartel's commitment to a deal. 

 (Reporting By Jessica Resnick-Ault; Editing by Alden Bentley)

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