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Rising OPEC and U.S. oil supply, coupled with stalled economic and crude demand recovery, have pushed the futures market structure back to indicating a surplus, last observed during oil’s collapse in April and May amid the coronavirus pandemic.

The development is a headache for the Organization of the Petroleum Exporting Countries, which had been hoping demand would recover quicker after a round of record global output cuts. The group will either have to consider further production cuts or tolerate lower oil prices for longer.

The surplus market structure, when prompt prices are weaker than future prices, is also a boon for traders, as they can store crude in the hope to resell it later at a profit. Royal Dutch Shell, Total, Eni and Norway’s Equinor have all reported bumper trading profits over the past week.

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Front-month September Brent futures in the past week have been trading at a discount of US$2 a barrel to March, 2021, the steepest discount since May, when lockdown measures against the virus outbreak cut global oil demand by a third.

The structure is known as contango and usually indicates an immediate oil surplus and hopes for a demand recovery in future months. The opposite structure is known as backwardation.

“OPEC’s experiment to increase production from August could backfire as we are still nowhere near out of the woods yet in terms of oil demand,” said Bjornar Tonhaugen, Rystad Energy’s head of oil market research.

“The market will flip back into a mini-supply glut and a swing into deficit will not happen again until December, 2020.”

OPEC did not respond to a request for comment.

Howie Lee, economist at Singapore’s OCBC bank, said the market was unconvinced demand was recovering and instead was choosing to buy further down the curve at a rising premium.

Record coronavirus infection and death rates in the United States and some other parts of the world are stoking fears that a new virus wave could further hit demand.

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Many exchange-traded funds were also spreading their long positions more equally across the curve after some asset managers were badly burnt by April’s negative expiry of U.S. front-month WTI crude futures, Mr. Lee said.

Brent spreads have historically been a good proxy for the global production-consumption balance, as well as inventories.

PHYSICAL CRUDE WEAKNESS

The physical oil market is also weakening.

Cash Dubai and DME Oman prices on Tuesday flipped into discounts to Dubai swaps for the first time since end of May because of weak demand including from China. Dubai August-September inter-month spreads also flipped from backwardation into contango in late July.

Abu Dhabi, Iraqi and Qatari grades all fell to spot discounts to their official selling prices and some cargoes are still hanging unsold, according to three Asian traders.

Demand from top buyer China softened owing to weak margins, prolonged port congestion, severe flood and limited crude import quotas, several China-focused traders have said.

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In Europe, rising U.S. exports are also depressing spot physical prices.

“U.S. producers are bringing back wells they had previously shut. ... Given the disappointing demand, it raises the possibility that the market returns to building inventories,” Warren Patterson from ING said.

U.S. crude exports have risen to 3.2 million barrels a day last week, the highest since mid-May. Much of the U.S. production curtailments in the spring came from shale wells that were choked back but not shut-in completely.

WTI at Midland, Tex., the heart of the Permian basin, this week slid to trade at a discount to benchmark futures as curtailed volumes returned to the market, traders said.

“The market is most certainly feeling the effects of the China buying ending after the massive buying seen over the last few months,” Scott Shelton from United ICAP said.

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