The market was also nervous about signals from Opec ministers that the current deal on production cuts might not be extended after the organisation’s May 25 scheduled meeting, and continuing increases in US shale oil drilling and production.Oil Price Slump 油价下跌 أسعار النفط
The build in inventories was, in itself, not so surprising. Oil Price Slump 油价下跌 أسعار النفط
US refineries are going through spring maintenance after running flat-out for months, so their crude use is down. Oil Price Slump 油价下跌 أسعار النفط
It does not necessarily signal that American oil output is stronger than shown in official figures. Oil Price Slump 油价下跌 أسعار النفط
The International Energy Agency believes that Opec cuts have helped developed-country stocks drop below 3 billion barrels for the first time since December 2015, although China and other emerging nations continue to add inventories.
The futures curve – the price for buying or selling oil at a specified month in the future – has an odd structure. Oil Price Slump 油价下跌 أسعار النفط
Last week’s slump has put the short-term curve into contango, where the future price exceeds the prompt price. Oil Price Slump 油价下跌 أسعار النفط
From next February until December 2019, the curve is in backwardation, with longer-dated prices below near-term prices. Oil Price Slump 油价下跌 أسعار النفط
And then the curve reverts to contango, rising to around $57 per barrel for Brent crude by 2024.
These might seem like arcane technicalities but have an important impact on oil market players.Oil Price Slump 油价下跌 أسعار النفط
Anyone with physical oil in storage can make a guaranteed profit by holding on to it until February, after allowing for the cost of storage, insurance and financing.
But if the near-term curve enters backwardation, they would do better to dump their stocks, bringing down the prompt price but easing the worldwide glut of inventories.
Shale oil wells typically yield most of their output over their first year or two of operations, before production dwindles. Oil Price Slump 油价下跌 أسعار النفط
Over the past couple of years, the entire forward curve was in contango, so allowing shale producers to lock in higher prices for the useful life of their wells.
Whenever Opec did raise the prospect of production cuts, without actually delivering, as in last April’s failed meeting in Doha, futures prices would jump above the prompt price, making hedging easier.Oil Price Slump 油价下跌 أسعار النفط
But now the market dynamic is different. Part of Opec’s objective has been to move the near-term curve into backwardation, with its production cuts raising the prompt price while the prospect of a breakdown of the Opec deal keeps prices weaker a few months out. This makes hedging less attractive.Oil Price Slump 油价下跌 أسعار النفط
This is entirely consistent with Reuters’ report on Thursday that advisers to the Saudi energy minister, Oil Price Slump 油价下跌 أسعار النفط
Khalid Al Falih, told US shale oil executives that Opec would not necessarily extend its cuts and take all the burden of market rebalancing.
This message, no doubt intended to be leaked, dampens prices a few months out. The latest plunge is also a useful reminder to shale companies and financiers that their investments are not a sure bet.Oil Price Slump 油价下跌 أسعار النفط
Opec’s concurrent efforts to dampen the shale boom, preserve its market share, draw down inventories and restore prices to a level it finds reasonable have moved the market towards the elusive “balance”, but very slowly.
An extension of the production deal in May, likely but requiring further compromise, is essential to the current strategy.
Otherwise, we can expect yet another twitch from the stubbornly undead price slump.
Robin Mills is the chief executive of Qamar Energy and the author of The Myth of the Oil Crisis
At the end of last week, prices, which had been very stable all year, suddenly plunged by 8 per cent. Oil Price Slump 油价下跌 أسعار النفط