The oil futures market is up this week, suggesting a market tightening could be imminent.
According to Bloomberg estimates, key spreads in the oil derivatives markets are showing increasing strength following the recent announcements of new production cuts by OPEC+ countries Saudi Arabia and Russia.
Prompt spreads in the futures market have returned from contango to backwardation.
Contango is the condition of the market when prices for later delivery are higher than prices in the previous month – a market situation that indicates oversupply. The opposite market situation—backwardation—typically occurs during times of market deficits, and during this period, front-month contract prices are higher than later-month contract prices.
Last week, the six-month Brent spread tipped toward contango for the first time since December 2022 after months of backwardation. US benchmark WTI Crude also fell into contango on June 27 for the first time since March.
But in recent days, buy-now spreads have widened, swap contracts linked to physical supply have surged, and the premium of bearish puts over bullish calls has narrowed in the options markets.
On Monday, Saudi Arabia and Russia announced new cuts in the world’s oil supply almost simultaneously.
Saudi Arabia said it would extend its unilateral 1 million bpd oil production cut through August. Saudi Arabia will produce around 9 million bpd in both July and August after the voluntary cut was extended until next month.
“This additional voluntary cut is intended to increase precautionary efforts by OPEC-plus countries with the aim of supporting oil market stability and balance,” Saudi Arabia said.
Minutes after the Saudi announcement, Russia’s Deputy Prime Minister Alexander Novak said Russia would cut its crude oil exports by 500,000 bpd in August to ensure a balanced market.
By Tsvetana Paraskova for Oilprice.com
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