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Vladimir Zernov
Crude Oil

Oil Video 21.05.20.

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The Spread Between The Front-Month Contract And Longer-Dated Contracts Continues To Decrease

Yesterday’s inventory report provided an additional boost for oil prices which continue to recover. Declining inventories show that supply cuts are starting to impact the market while demand is increasing as the U.S. economy reopens.

Positive dynamics are seen across all global benchmarks. The spread between the global benchmark Brent and the U.S. WTI has narrowed as market participants concluded that the U.S. will not run out of oil storage.

I’d note that the recent progress on the oil price front is most visible in the front-month July 2020 contract. Longer-dated contracts had less upside, and the spread between the July 2020 contract and the December 2020 contract has narrowed materially.

This means that the market does not anticipate that the recovery will be very strong. Currently, the spread between the July 2020 contract and the December 2020 contract is just $1.50, which is a small number given the highly volatile market situation.

A Truly Global Pandemic Is Still A Risk For The Oil Market

Oil traders are mostly focusing on oil demand from two main consumers – the U.S. and China. This makes sense this these countries have a major impact on the global oil supply/demand balance.

China has recovered after the initial shock from the coronavirus and its oil demand has been increasing in recent weeks, providing support for the oil market. The U.S. is reopening its economy and its oil demand is also showing signs of life.

Meanwhile, the total number of coronavirus cases in the world has passed the 5 million mark, and the virus gained a foothold in the regions that are likely less prepared for the pandemic – Latin America and Africa.

At this point, the market is ignoring this development as it is focused on the production cuts and the reopening of the U.S. economy, but if the virus numbers get worse, the truly global spread of the virus will be hard to ignore.

While U.S. and China will remain the main players on the demand side of the oil market for years to come, problems at the other side of the world could visibly impact the world oil demand as the world economy tries to get out of the recession.

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