LONDON: The structure of the global benchmark Brent crude futures market is at its most bullish since April, reflecting the impact of production cuts from the Organization of the Petroleum Exporting Countries and allies (OPEC+) on available supply.
Brent, which is used to price over three-quarters of the world’s traded oil, has been rising since late June, as leading producer Saudi Arabia has spearheaded output cuts.
The premium of the front month Brent contract to the six-month contract rose to as much as $3.34 a barrel on Thursday, the highest since April. This structure, called backwardation, indicates tightening supply for prompt delivery.
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At the end of June, the front month contract was at a discount to the six month contract, a structure known as contango that indicates plentiful supply.
Riyadh last week extended a voluntary oil output cut of one million barrels per day (bpd) for another month to include September, and did not exclude further cuts. Russia also said it will reduce exports in September.
Apart from the OPEC+ cuts, prices have been supported by expectations oil demand could increase as interest rate rises taper. At the same time, extra stimulus is anticipated in China, the world’s leading crude importer, which could drive fuel consumption after a weak second quarter.
“You have to wonder whether the recent announcements from Saudi Arabia and Russia, combined with better economic prospects, will be enough to lift the price to new 2023 highs, and above $90 in the case of Brent,” Craig Erlam, OANDA analyst, said.
On Thursday, US inflation data inspired hopes that the Federal Reserve was near the end of its aggressive rate hike cycle, and OPEC said it expected “healthy oil fundamentals” for the rest of the year.
If oil prices rise too much, however, they could reignite inflation, with bearish implications for the market, John Evans of oil broker PVM said.
“Significant increases in oil prices will bring significant counter measures from central bankers, making oil a possible master of its own downfall,” he said.
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