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Oil investor impatience grows over global surplus
[LONDON] Oil investors are growing increasingly disgruntled with the pace at which supply and demand are rebalancing, cutting their bullish bets and pushing the benchmark price to its biggest discount relative to future prices in nine months.
The premium of Brent crude futures for delivery in six months over those for prompt delivery, one measure of confidence in the market outlook, on Monday shot to its largest since February, the point at which Opec first floated the idea of a possible deal on output to erode a two-year-old global surplus.
The spread, or contango, is now at US$3.51 a barrel , up from US$2.30 at the end of September, when Opec announced its intention to strike a deal to cut production when it meets in Vienna later this month.
Generally, a widening in this spread can indicate one of two things: either investors have grown more pessimistic over the prospect of a rally in prices for prompt delivery, or they are more optimistic over the likelihood of a longer-term rally.
In this case, the prompt Brent contract has led the move, having fallen by 5.2 per cent since the end of September, compared with a fall of 2.6 per cent in the price of oil for delivery in six months.
"The increasing contango is really about the physical side of the market," SEB chief commodities strategist Bjarne Schieldrop said. "We've had an increase in inventories rather than a decrease that has coincided with refinery outages. It's not a pretty sight."
The most recent Reuters survey estimated Opec supply hit a record high of 33.82 million barrels per day (bpd) in October, up 130,000 bpd from September and up 2.2 million bpd from October last year.
Since announcing their intention to cut production to a range of 32.5 to 33 million bpd following a meeting in Algiers, the discord among the world's largest exporters has grown. Libya, Nigeria, Iraq and Iran have clamoured to be exempt from any reduction as they recover market share lost to civil unrest and, in the case of Tehran, international sanctions.
Those four already represent a third of OPEC output and an exemption would increase the pressure on Saudi Arabia and its Gulf neighbours to deliver the bulk of the cuts.
Highlighting the increasingly uphill battle to achieve consensus, Opec sources told Reuters last week that Saudi Arabia had warned it could raise output steeply if rival Iran refused to limit supply.
Despite Opec Secretary-General Mohammed Barkindo attempting to soothe concerns about the group's ability to cut meaningfully, oil prices are at their lowest in nearly two months, having unwound the gains made since late September.
"The problem in a nutshell is that too many members want higher prices without making any sacrifices and the market is losing patience," PVM Oil Associates analyst David Hufton said in a report on Monday. "Confidence in a successful Opec outcome has evaporated." Investors have cut their net long holdings of crude oil futures and options by around 100 million barrels in just two weeks.
Another question hangs over non-Opec members, specifically Russia, the world's largest producer of crude, and their willingness to join in an effort to freeze or cut output.
Russia set a new post-Soviet record high in October of 11.2 million bpd, underscoring the challenge the government might face in agreeing to freeze output.