Global petroleum inventories are teetering close to the long-term seasonal average, yet futures prices have already plunged into a steep backwardation, driven by trader expectations of further depletion throughout the remainder of 2024.
Estimations from the Organisation for Economic Co-operation and Development (OECD) indicate that commercial inventories of crude oil and refined products stood approximately 75 million barrels below the preceding ten-year seasonal average by the end of February, marking a 3% decline or a deviation of -0.48 standard deviations.
Despite considerable fluctuations in spot prices and calendar spreads, the deficit in inventories has exhibited minimal change since March 2023, as revealed by the U.S. Energy Information Administration‘s “Short-Term Energy Outlook.”
Additional production cuts by Saudi Arabia and its allies within the OPEC+ coalition have been countered by a faster-than-anticipated surge in non-OPEC output, predominantly stemming from the United States, Canada, Brazil, and Guyana.
Even amidst prolonged slowdowns in manufacturing and freight activity across major regions such as North America, Europe, and China, petroleum consumption continues to climb steadily, aligning with its long-term trend.
Spot prices versus spreads indicate a nuanced market landscape, with front-month futures prices for the benchmark Brent contract averaging around $84 per barrel in March, nearly mirroring the long-term average since the turn of the century, when adjusted for inflation.
While average front-month prices have seen a modest uptick from December’s recent low of $78 per barrel, the majority of price escalations have been concentrated in contracts nearing delivery, with minimal to no changes in prices for future deliveries beyond 2025.
This trend has propelled the market structure into an increasingly steep backwardation, with front-month prices commanding a premium of nearly $4 over contracts for delivery six months later, marking the 91st percentile.
The anticipated depletion of inventories throughout the year is driving traders’ reactions, amidst signals suggesting an extension of production cuts by Saudi Arabia and its OPEC+ allies. Such moves are perceived as a proactive measure to support prices at higher levels, despite robust consumption and significant inventory drawdowns.
Saudi Arabia’s commitment to prolong voluntary production restraints has mitigated downside risks to oil prices, despite lingering uncertainties surrounding the global economic outlook and interest rates.
As of March 12, hedge funds and other major players have bolstered their net position in futures and options linked to Brent and U.S. crude, indicating a relatively bullish stance compared to the record lows witnessed in December.
The prevailing contradiction between average spot prices and a pronounced backwardation underscores a pivotal juncture in the market. Should global inventories dwindle in line with the steep backwardation, spot prices are poised to surge, potentially surpassing the $90 mark. Conversely, if the market remains adequately supplied, the backwardation is anticipated to gradually alleviate.