The Brent crude futures spread for December 2017/December 2018 traded on the Intercontinental Exchange flipped to backwardation Thursday for the first time in three months amid growing optimism that global oil market rebalancing will drive the price structure higher.
The December 2017/2018 spread stood at 24 cents/b at 4:30 pm Singapore time (0830 GMT) Thursday, the highest since May 30, when it stood at 38 cents/b at 0830 GMT.
The spread was firmly in contango between June 1 and Wednesday.
Growing optimism about the global oil market reaching balance was helping strengthen prices at the prompt, resulting in the spread's flip into backwardation, analysts said Friday.
The prompt November/December spread for the European benchmark contract has been mostly strongly backwardated since mid-August. It flipped briefly into contango at end August before flipping back into backwardation September 5, and settling at 25 cents/b at the New York close Thursday.
"Increased estimates of oil demand by IEA and OPEC, driven by China and the US, continue to reverberate through the market," ANZ Research analysts said in a note Friday.
Latest reports from OPEC and the International Energy Agency both revised oil demand growth for 2017 upwards, which boosted market sentiment, analysts said.
OPEC now forecasts demand for its output to average 32.67 million b/d in 2017, a rise of 200,000 b/d from its estimate in July, and sees demand in 2018 at 32.83 million b/d, up 400,000 b/d from its July forecast, according to its August monthly report released Tuesday.
"OPEC said that it sees signs of higher demand and tightening supplies. Of course, OPEC are hardly likely to say anything else, but the backward action in the front end Brent futures does give credence to the statement in this case," OANDA senior market analyst Jeffrey Halley said in a note Wednesday.
The IEA Wednesday lifted its estimate of 2017 oil demand growth for the third month in a row, to 1.6 million b/d.
"OECD demand growth continues to be much stronger than expected, particularly in Europe and the US," the IEA said.
FURTHER SUPPORT
Moreover, support for prices has also emerged from other factors, including a drop in OPEC production in August, a larger-than-expected draw in US product draws in the wake of severe hurricanes and increased optimism regarding the possible extension of OPEC-led cuts beyond March 2018.
For the week ended September 8, US gasoline stocks fell 8.428 million barrels to 218.31 million barrels -- just 1.8% above the five-year average and the largest weekly decline on record, US Energy Information Administration data released Wednesday showed.
"The record fall in gasoline inventory is also stoking views that the demand for crude oil will increase substantially as refineries came back online and seek to rebuild stockpiles," the ANZ Research analysts said.
"In our opinion, the medium-term price trend will be influenced more by whether, and how, US production continues to rise -- recently it fell short of expectations," said analysts from Commerzbank in a note Thursday.
"The oil rig count in the US has remained virtually unchanged since the end of June," they added.
Latest data from Baker Hughes showed the number of active US oil rigs falling by 3 in the week ended September 8 to 756.
Analysts said prices will likely remain muted until the OPEC monitoring committee meets in Vienna September 22, where decisions regarding a possible extension of the production cut agreement beyond its May 2018 expiry and the inclusion of Libya and Nigeria in that agreement are expected to be made.
