Although we woke to some COVID-19 nasties last week, crude oil contango has been tightening despite the front-end yo-yo. Spreads are at their narrowest in months, reflecting the shift in the production/demand balance on a combination of factors:
- Lower production by OPEC+ countries
- Numerous weather-related shut-ins in the Gulf of Mexico
- Asia's increased purchases (China binged on cheap oil in the first half of the year)
Calendar spreads are down along the Brent curve, from mid to the end of 2021 are now below $0.10 contango. And, really, that’s the key to holding the front end in check.
As John Kemp (Reuters) puts it:
"Such contango would not cover the cost of storing and transporting crude, implying that stocks are expected to be below the five-year average and falling rapidly at that point."
Rising COVID cases and restrictions tempered the enthusiasm around good vaccine results. Still, we shouldn’t expect to see the same playbook for a downside oil market risk that we saw with the second COVID wave in Europe; not only were the vaccine results excellent (which should soon lead to Emergency Use Authorizations), but rising cases are elevating expectations around Fed action at the upcoming December 16 meeting when they may conduct a QE twist that will do much of the oil market’s heavy lifting due to inactivity on the stimulus front.
But it’s all down to OPEC and no formal decision will be taken before the full OPEC+ ministerial meeting at the end of this month. Still, with the rise in coronavirus infections and new mobility restrictions, it seems all but a rubber stamp kind of likelihood that an extension
As we count down to the meeting of OPEC on November 30th, the Axi Expert Series is pleased to welcome Eurasia Group DIRECTOR, ENERGY, CLIMATE & RESOURCES Director Henning Gloystein to discuss his views and insights in what’s an important week for oil markets.