Ahead of the delayed OPEC+ meeting on Thursday, there are indications oil supply is starting to run ahead of demand, highlighting the challenge facing the cartel as it prepares to set output policy for 2024.
With futures well down from their September highs, widely watched timespreads for both global benchmark Brent and US counterpart West Texas Intermediate have softened, signaling ample supply, while in the US stockpiles have jumped. In addition, other more esoteric indications in the physical market, including differentials between specific grades, have been flashing warning signs.
The Organization of Petroleum Exporting Countries and its allies, which gather in an online meeting, need to address what analysts see as burgeoning global supply that’s weighed on prices. Against that backdrop, the International Energy Agency has forecast that the market will flip back into surplus next year. At present, Saudi Arabia and Russia are expected to extend voluntary supply cuts, and market watchers say deeper collective reductions are also possible.
Of primary importance is the market’s pricing structure along the futures curve. The gap between WTI’s two nearest contracts has dipped into a bearish contango structure, with nearer-dated prices now at a 26-cent-a-barrel discount to later-dated ones. A month ago, the opposite pattern — known as backwardation — held sway, with a premium of more than 80 cents.
Brent’s prompt spread, meanwhile, fell into contango earlier this month for the first time since June, although it’s since recovered a little ground.
Longer-term spreads have come off. Brent’s six-month gap was last at $1.05 a barrel in backwardation compared with nearly $4 a month ago.
In the US, stockpiles have been swelling. Nationwide inventories that hit the lowest level this year in late September, have since rebounded, rising in five of the past six weeks.
Other indications of ample near-term supply include sour crude grades in the Mediterranean trading at ever-widening discounts. For one, Basrah Medium is now offered at a discount of about $2.50 a barrel to its official selling price in the Mediterranean, a level many traders deem very low. Prices of other grades including Johan Sverdrup have also sunk.
Asia’s appetite for oil barrels is also softening, with the premium of Oman futures versus Dubai swaps declining this month. Spot differentials of key Middle Eastern grades including Murban have also been falling on weaker demand from buyers in the region, according to traders.
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