Oil Market Could See Long Term Contango

The oil market could stay in a state of contango for longer after supply and demand finally balance due to the vast amount of crude and products in storage, Reuters reported on Friday, citing analysts and investment banks.

Contango is the state of the market in which prices for delivery at later dates are higher than prompt prices—a market situation signaling oversupply and one which traders use to store oil for delivery at a later date. The opposite market situation—backwardation—typically occurs at times of market deficit and in it, prices for front-month contracts are higher than the ones further out in time.  

The supply and demand balance on the oil market could tip into deficit as early as in June, according to some analysts, including Goldman Sachs.

Improving global oil demand and faster-than-expected production curtailments from outside the OPEC+ pact are set to push the oil market into deficit in June, according to Goldman Sachs. Yet, there is little room for an oil price rally in the near term because of the still sizeable oversupply of crude oil and refined products, Goldman Sachs said in a note in the middle of May.

But the contango on the oil market could outlast the immediate deficit because of a high amount of oil on floating storage, according to data from Citi cited by Reuters.

“An inflection point is happening in physical fundamentals, although oil-on-water may cast a shadow on the recovery,” according to Citi.

During the ‘peak lockdown’ period when every major economy except China was under lockdown in late March and early April, the oil market was in a state of super contango. The glut was growing, storage capacity was shrinking as oil demand cratered, and on top of this, OPEC’s leader and the world’s top exporter, Saudi Arabia, was intent on further cratering the market with a supply surge, before it sat down –urged by the U.S. – to forge a new deal with Russia for record production cuts.

Since the beginning of May, demand has started to slowly recover while supply is coming off the market from the OPEC+ cuts and economics-driven curtailments in North America. But the sizable oil in storage, including floating storage for which traders have chartered tankers for at least six months, could keep the market in contango even though it could tip into deficit.

By Tsvetana Paraskova for Oilprice.com

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