Oil’s price structure for Brent and U.S. crude has caused storage to be drawn down, signalling a recovery in global markets and tighter supplies as major producers cut output to compensate for demand loss owing to the novel coronavirus pandemic.
Brent last week moved into backwardation, where oil for immediate delivery costs more than supply later. The premium at which Brent crude futures for August delivery are trading above September were as high as 15 US cents on Friday.
Short-term Brent swaps in the North Sea market, contracts for differences, have also moved into backwardation, suggesting a stronger physical market.
That has encouraged storage to be drawn down.
“The floating storage, in particular in the [U.S.] Gulf Coast is already decreasing as buyers are opting for taking out the floating tankers rather than engaging into a new booking,” said Rystad Energy’s senior oil markets analyst Paola Rodriguez Masiu.
She added that the extension of output cuts by OPEC+ helped the market to find its balance after months.
The Organization of the Petroleum Exporting Countries and allies, known as OPEC+, have been cutting output since May by a record 9.7 million barrels a day (b/d), 10 per cent of global supply.
The new oil price structure marks a turnaround from earlier when the coronavirus outbreak had pushed oil prices into the opposite structure, when prompt prices fell below forward prices, known as contango.
On Friday, the six-month contango on Brent futures was at around -25 US cents, its shallowest since early March before a supply cut deal between OPEC and its allies led by Russia collapsed, dragging crude prices to record lows.
The drop in U.S. oil production also helped the recovery of the markets. U.S. crude output fell last week to 10.5 million b/d, the lowest since March, 2018, the Energy Information Administration said.
Markets have also found balance as fuel demand across Europe staged a gradual recovery after hitting record lows at the height of lockdown measures in April.
“June will show some further improvement in demand for driving fuel versus May, but after that, the pace of demand recovery will slow down,” said Petromatrix.
The six-month contango for diesel narrowed significantly in recent weeks, from -$93 in late April to -$19 on Friday.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.