Oil traders to Saudi Arabia: "show us the barrels" - Kemp
(John Kemp is a Reuters market analyst. The views expressed are
* Chartbook: https://tmsnrt.rs/2ID8R9J
By John Kemp
LONDON, April 23 (Reuters) - "The United States, Saudi
Arabia and the United Arab Emirates ... are committed to
ensuring that global oil markets remain adequately supplied,"
the White House said in a press statement issued on Monday.
"Oil markets are well-supplied and oil inventory levels are
seasonally strong," the U.S. State Department wrote in an
accompanying briefing note explaining the rationale for
eliminating sanctions waivers for buyers of Iranian oil.
"We have commitments from oil-producing countries, including
the kingdom of Saudi Arabia and the United Arab Emirates, to
increase oil production to offset reductions in Iranian oil
exports," the department announced.
The department observed that oil stocks in OECD countries
remain above the five-year average while U.S. oil production and
exports are increasing.
"Other major producers have signalled to markets a
willingness and ability to increase production to compensate for
additional Iranian reductions," the department added.
The decision to eliminate all remaining sanctions waivers
for Iran's oil buyers follows a round of top-level diplomatic
contacts between the White House and leaders of Saudi Arabia and
the United Arab Emirates.
Tougher sanctions are likely contingent on a U.S.
understanding that Saudi Arabia and the United Arab Emirates
will make up lost Iranian barrels at least one-for-one to keep
Senior U.S. policymakers have been anxious to stress tougher
sanctions will not reduce the availability of crude or lead to
higher crude costs and increased fuel prices for motorists.
Oil traders, however, think differently. Tougher sanctions
are seen reducing oil supplies during the second half of the
year, leaving the market under-supplied, inventories falling,
and prices likely rising.
Brent's six-month calendar spread has jumped to a
backwardation of more than $3 per barrel, up from less than
$2.50 before the announcement and just $1.20 a month ago (https://tmsnrt.rs/2ID8R9J).
Brent's calendar spread has been the best signal for changes
in the production-balance since the late 1990s, alternating
between backwardation and contango as the market cycles between
under- and over-supply.
Brent's backwardation is now at the highest level since
March-April 2018 (when Iran sanctions were also high on the
agenda) and before that June 2014 (when Libya's production was
interrupted by civil war and Islamist fighters were racing
across northern Iraq).
The calendar spread is now in the 88th percentile for all
trading days since 1990, indicating traders expect the market to
be significantly under-supplied in the second half of the year.
The increasing backwardation in Brent signalled many traders
expected the market to be under-supplied in the second half of
the year before sanctions were abruptly tightened.
Even before the sanctions announcement, hedge funds and
other money managers had bought more than 550 million barrels of
extra crude and fuels futures and options in the last 14 weeks
expecting higher prices.
Bullish bets on a further rise in Brent prices outnumbered
bearish ones on a fall by a ratio of almost 13:1 last week up
from just 2:1 in December.
Traders have reached a very different judgment about the
outlook for oil supplies, inventories and prices in the second
half of 2019 to advisers at the State Department or in Saudi
Arabia and its allies.
Oil traders appear sceptical Saudi Arabia and the United
Arab Emirates will offset the reduction in Iran's exports fully
without a further increase in prices first, notwithstanding
their understandings with the White House.
Traders will likely continue pushing Brent spot prices and
spreads higher until Saudi Arabia and the United Arab Emirates
make a firmer commitment to boost their production and show the
market extra barrels, or the White House increases pressure on
them to do so.
- Iran sanctions decision rewards hedge fund oil bulls
(Reuters, April 23)
- White House will tie Iran sanctions review to response by
Saudi Arabia (Reuters, April 17)
(editing by David Evans)
First Published: 2019-04-23 12:54:11
Updated 2019-04-23 14:00:15
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