Key oil market indicator shows market tightest in three years

By Alex Longley on 1/4/2018

LONDON (Bloomberg) -- One of the key gauges of oil market strength hasn’t looked this good for bulls since 2014.

WTI futures closest to expiry are trading at the biggest premium to the next month in more than three years, as inventories plunge at the key storage hub of Cushing, Oklahoma. Stockpiles at Cushing -- the delivery point for WTI contracts -- slid to the lowest since February 2015 last week.

A winter storm in the U.S. is also boosting demand for heating oil, while some power plants are running short of supplies. Brent and WTI closed on Wednesday at the highest since December 2014 amid optimism that OPEC-led output cuts will continue to rebalance the market. Equity markets have also been buoyed by gains in oil and gas stocks.

“You have the continued stock draws in Cushing supporting the WTI spreads,” Petromatrix Managing Director Olivier Jakob said by phone. “The harsh weather in the U.S. is a supportive factor. There’s a global move into oil as we start the year.”

Options traders are now also betting on continued strength in WTI. The equivalent of more than 10 million barrels of bullish call options contracts that profit most with WTI in backwardation of more than $0.15/bbl traded on Wednesday. The premium on WTI for February delivery versus March widened to as much as $0.16 on Thursday, the most backwardated since November 2014.

The Brent benchmark has seen similar strength, with the premium of December 2018 Brent futures over December 2019 rising to $3.81/bbl on Thursday, the highest since it began trading. As well as tightening supply and the U.S. storm, Brent has also been supported by political tensions in Iran, said Tamas Varga, analyst at PVM Oil Associates.

“The market is tightening and it’s tightening very quickly,” Energy Aspects Ltd. Chief Oil Market Analyst Amrita Sen said on Bloomberg TV. “The inventory overhang for all intents and purposes has drawn down, there’s not that much really left."

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