Futures prices indicate the physical market is easily absorbing the large volume of crude being supplied and global rebalancing is well underway.
The price for storing a barrel of Brent for six months has fallen from more than $1.23 per month at the start of 2015 to just 37 cents per month on May 21, Reuters reported. US crude inventories are still more than 95 million barrels above the level at the end of 2014 and 115 million barrels higher than normal at this time of year. There are also reports of a build up in stocks in China, either crude oil or refined products, some of which may have been put into long-term strategic storage.
According to most estimates, the global market has been oversupplied by between 1.5 million and 2.5 million barrels per day since the start of the year.
Yet the price for storing crude has fallen by two-thirds in the space of just four months, which indicates there is no shortage of space in tank farms and the supply-demand surplus may be being overestimated.
Strong growth in demand is helping the market absorb record crude supplies from Saudi Arabia and the US shale fields. Casual observers focus on spot prices but physical traders are more likely to concentrate on differences between futures prices in adjacent months as an indicator of tightness or slack in the market.
Differences between the first-to-deliver futures contract and the sixth provide a good indication of expected demand for storage and by extension the direction of inventories in the short term.
The price gap hit as much as $7.40 contango in early January as traders anticipated the enormous build up in reported crude stocks during the first four months of the year. But last week it has narrowed to $2.20 contango or less, suggesting traders expect far less demand for storage than previously.
“Markets around the world have surprised on the upside. Demand has definitely surprised on the upside in refined products,” an executive for Vitol, the world’s largest oil trader, told a conference.
Most oil analysts are still bearish about the outlook for oil prices over the remainder of 2015 and into the early part of 2016.
