Oil Prices ///
The prompt timespread for global benchmark Brent crude moved further into backwardation, while the nearest December contract is trading at a higher level than the same contract for December 2022.
After a split emerged between Saudi Arabia and the United Arab Emirates, the cartel couldn’t agree on what had been widely expected before this week: a full three-month delay to the scheduled January output increase.
The move reflects the growing importance of U.S. crude internationally -- the country five years ago ended restrictions on oil exports imposed during the energy crises of the 1970s -- and the fact that supplies of some of the North Sea’s key grades are dwindling.
Futures in New York traded near $45 a barrel. Discussions are now focusing on proposals for a gradual easing of production cuts over several months, following talks between Russia, Saudi Arabia and the United Arab Emirates, said a delegate.
Discussions have focused on a gradual relaxation of output cuts over several months, and according to one delegate there could be a one-month delay before the tapering starts.
Expanding stockpiles, strong demand in Asia and a suddenly resurgent North Sea market highlight the problems faced by OPEC and its allies as they consider whether a bifurcated market can handle more supply.
Differences between the Saudis and the UAE prevented the cartel from reaching a clear agreement on whether to delay a planned production increase. Traditionally stalwart allies, a fissure has emerged between the two Persian Gulf exporters as Abu Dhabi pursues a more independent oil policy.
OPEC ministers met on Monday and had been scheduled to talk to their non-OPEC partners on Tuesday. At one point, there had appeared to be a consensus building between ministers yesterday, but the meeting then became unusually fraught.
OPEC+ ministers will now meet on Thursday rather than Tuesday to allow more time to deliberate on whether to delay a planned increase in output from January.
Exxon disclosed it will write down the value of North and South American natural gas fields by $17 billion to $20 billion as cratering crude prices, a global supply glut and a pandemic-driven collapse in fuel sales strain the balance sheet.
Market-watchers have been expecting OPEC+ to agree on a three-month delay -- and if the group doesn’t deliver prices will suffer. At stake also is the credibility of the cartel whose actions have underpinned the market since the spectacular oil crash earlier this year.
The 23-nation coalition is debating whether to maintain the output cuts at current levels, deferring the increase scheduled for January. Some members are concerned that global markets remain too fragile to absorb additional barrels -- particularly after Libya’s output soared -- while others are keen to sell more crude.
When OPEC+ meets this week in Vienna, impatient member states, surging Libyan production, and Chinese demand splitting off from the West will create headaches for ministers. Also, Arctic drilling plans in the U.S. and Norway are being motivated less by economics and more by geopolitical maneuvering, and the North American drilling rig count shows strength that exceeds even the most optimistic predictions from earlier in the year.
“In the future, certainly we believe OPEC will be the swing producer — really, totally in control of oil prices,” Bill Thomas, CEO of EOG Resources, the biggest independent shale producer by market value, said earlier this month. “We don’t want to put OPEC in a situation where they feel threatened, like we’re taking market share while they’re propping up oil prices.”
Oil has jumped 26% this month after signs that Covid-19 vaccines are imminent boosted expectations for a swift recovery in energy demand next year. However, while there are indications that Asian consumption remains healthy, Europe is still lagging.
A clear majority of OPEC+ is expected to maintain their supply curbs at current levels for a few months longer due to lingering uncertainty about the strength of demand. However, the decision is by no means certain amid public complaints from Iraq and Nigeria, and private discord with the United Arab Emirates.
While crude prices have rebounded to an eight-month high, demand in early 2021 still looks too fragile to absorb the extra barrels. At the same time, key OPEC+ members Iraq and the United Arab Emirates have signaled they’re eager to ramp up sales as soon as possible.
The Organization of Petroleum Exporting Countries and its allies, who will meet on Monday and Tuesday, are already grappling with a difficult market to evaluate. Oil demand has rarely been so volatile.
With the prospect of a coronavirus vaccine improving oil’s longer-term outlook, there’s been a renewed rally in the forward curve. On Wednesday the much-watched spread between Brent’s nearest two December contracts briefly flipped into a bullish backwardation for the first time since March.
Two of the oil market’s most-watched inter-month price spreads -- one denoting short-term strength, the other reflecting an improving longer-term outlook -- this week flipped into what traders call backwardation, a structure that’s generally seen as reflecting tighter conditions.