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Column: Physical oil market tightens as output cuts, economic recovery take hold - Kemp - Metro US

Column: Physical oil market tightens as output cuts, economic recovery take hold – Kemp

FILE PHOTO: A TORC Oil & Gas pump jack near Granum

LONDON (Reuters) – Physical crude markets are signaling a rapid shift from an enormous over-supply at the height of the coronavirus lockdowns in April toward an expected under-supply in the second half of the year.

Dated Brent’s six-week calendar spread has shrunk to a contango of less than 70 cents per barrel from more than $6 per barrel in the first week of April.

Calendar spreads correlate closely with the expected production-consumption balance and are usually a more accurate indicator than spot prices alone.

Dated Brent is based on the cost of buying and selling physical cargoes from the Brent, Forties, Oseberg, Ekofisk and Troll field-systems in the North Sea.

Unlike futures contracts <LCoc1>, trading is very near-term and dominated by producers, refiners, physical merchants and large financial institutions, with few hedge funds and no retail investors.

Because dated Brent is a complex of seaborne crudes, it avoids the storage constraints that have distorted inland WTI prices recently.

The shrinking calendar spread is therefore a strong signal the physical market has become much better balanced over the last six weeks.

The Organization of the Petroleum Exporting Countries and its allies have cut crude exports sharply while refineries’ consumption has started to rise as lockdowns ease.

Fears about running out of crude storage at tank farms on land and in vessels off the coast have disappeared.

Dated Brent’s six-week calendar spread is now in the 20th percentile for all trading days in the last decade up from the 1st percentile early last month.

In a longer term perspective, the crude market remains weak but no longer exceptionally so. Current spreads are consistent with high but stable or falling inventories, a sharp turn around from surging stocks a month ago.

Like the production-consumption balance, spreads tend to be cyclical, and are likely to tighten further, provided the economy continues to recover and oil producers remain disciplined.

(Editing by Emelia Sithole-Matarise)

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