(Fixes typo in headline. John Kemp is a Reuters market analyst.
The views expressed are his own)
* Chart 1: tmsnrt.rs/2oNQJPq
* Chart 2: tmsnrt.rs/2oSOBEf
* Slide deck: tmsnrt.rs/2pFYRTe
By John Kemp
LONDON, April 20 OPEC and some of the most
important hedge funds active in commodities reached an
understanding on oil market rebalancing during informal
briefings held in the second half of 2016.
OPEC committed to implement credible production cuts and
reduce global crude stocks while hedge funds responded by
establishing bullish long positions in both flat prices and
OPEC effectively underwrote the fund managers’ bullish
positions by providing the oil market with detail about output
levels and public messaging about high levels of compliance.
In return, the funds delivered an early payoff for OPEC
through higher oil prices and a shift from contango to
backwardation that should have helped drain excess crude stocks.
The understanding was initially successful between December
2016 and February 2017, with reports of strong compliance from
OPEC, spot prices rising $10 per barrel and calendar spreads
moving from contango to flat or, albeit briefly, backwardation.
But the understanding started to unravel with the calendar
spreads collapsing after Feb. 21 and flat prices dropping from
March 8 (tmsnrt.rs/2oNQJPq).
The sharp reversal in both spreads and flat prices inflicted
substantial losses on many bullish hedge funds in February and
The correction came amid growing doubts about whether OPEC
was really cutting oil supplies to the market by as much as
Global stocks of crude and refined products showed little
sign of drawing down during the first three months of 2017.
Bullish fund managers have pushed the time horizon for
expected stock draw downs back to the second half of the year.
OPEC has come under pressure to reconfirm the faith of hedge
fund bulls with an early commitment to extend current output
cuts beyond June.
Saudi and other senior OPEC ministers have been edging
towards an extension commitment in recent days.
But there are lingering doubts about whether OPEC can
deliver real market tightening during the second half of 2017.
Calendar spreads have been falling along the curve with
weakness extending from the prompt June-July (M7-N7) spread all
the way through to December-January (Z7-F8) (tmsnrt.rs/2oSOBEf).
U.S. crude imports from OPEC members Saudi Arabia, Iraq and
Venezuela have remained steady or increased since the start of
the year, according to the U.S. Energy Information
And reported global crude and products inventories have
remained stubbornly high, according to data compiled by the
International Energy Agency.
It is possible that global crude stocks could be falling
already as previously invisible stocks are repositioned and
become more visible to the market.
There is some evidence that unreported crude stocks held by
producer countries, in floating storage, and in tank farms in
the Caribbean and South Africa are being drawn towards the major
As crude is drawn towards the United States, Rotterdam and
Singapore, it is captured in published statistics.
But reported stocks need to start falling soon if hedge fund
managers’ confidence in rebalancing is to be maintained.
OPEC messaging about high levels of compliance has lost much
of its effectiveness and is no longer enough to justify a
bullish position in crude.
Reported stock changes now matter more for oil prices and
calendar spreads than compliance assessments by OPEC’s secondary
OPEC’s credibility is on the line: stocks need to show a
significant draw during the second and third quarters or many
hedge funds are likely to give up on the bullish narrative
prevailing since late 2016.
"Oil market rebalancing: the long and winding road",
Reuters, April 19: tmsnrt.rs/2pFYRTe
(Editing by Edmund Blair)