Want proof the 2019 oil rally is largely about tight supplies? Look no further than the spread between nearby and longer-dated futures contracts for Brent crude, the global benchmark.
In the chart below from a Thursday note, Michael Tran, commodity analyst at RBC, observed that the spread between the first-month futures contract on the ICE exchange and the sixth-month contract was at its widest since before oil prices collapsed in mid-2014.
RBC Capital Markets
“This is not simply an indicator that the marginal barrels are clearing, but a surefire sign of market tightness and that the scramble for barrels is in full force,” Tran wrote.
The June contract for Brent crude LCOM9, -3.34% traded at $3.71 over the December contract LCOZ9, -3.36% on Thursday, the widest 1-month/6-month spread in five years, noted Robert Yawger, director of energy at Mizuho Securities. The last time the spread traded in the $3.70 area, the spot month was trading well above $100 a barrel, he said, in a Friday note.
Oil futures were under heavy pressure Friday, giving back sharp gains scored earlier in the week. The June/December spread narrowed to around $3.18 but remains elevated.
Oil futures have rallied in 2019, rebounding from a rout late last year. Both Brent and the U.S. benchmark, West Texas Intermediate crude CLM9, -3.71% hit nearly six-month highs earlier this week after the Trump administration said it wouldn’t renew waivers that had allowed some major oil importers to continue purchasing Iranian oil following the resumption of sanctions last November.
Crude was already buoyed as the Organization of the Petroleum Exporting Countries, or OPEC, and its allies, primarily Russia, implemented output cuts at the beginning of 2019, while U.S. shale output has been slow to increase. Brent crude, as measured by the most active contract, remains up 33% since the end of last year, while the U.S. benchmark, West Texas Intermediate is up nearly 39%.
Tran and other analysts have warned that a tight global supply situation coupled with the U.S. efforts to almost fully remove Iran from the world market leave oil vulnerable to near-term spikes.
Read: Here’s what $100-a-barrel oil would do to the global economy
Also see: Strait of Hormuz: Oil ‘choke point’ in focus as U.S. ends Iran waivers
Iranian crude exports have averaged around 1.1 million barrels a day since the sanctions were put in place in early November, said Jason Gammel, oil analyst at Jefferies, in a Thursday note. He sees a drop in exports to around 500,000 to 600,000 barrels a day as realistic.
“We expect that OPEC+ will make up for the shortfall, although the Saudis have indicated that their exports would remain near the 9.8 mbd level in the near term,” Gammel wrote. “However, we estimate there is only 2.0-2.5 mbd of spare capacity, and supply risk concerns (Venezuela, Libya, etc) could thus lead to further steepening in the forward curve.”
Tran reiterated a forecast for Brent to average $75 a barrel through the rest of the year, but with risk “asymmetrically skewed to the upside,” with the potential for “geopolitically infused rallies” to shoot prices higher and potentially topping $80 a barrel for “intermittent periods” this summer.
“Fundamentally speaking, oil markets are tight. Aside from the Trump factor, there are few release valves on the horizon given that the global barrel count is fraught with geopolitical risk,” Tran said.
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