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Overseas Analysts Have Found A Catalyst For One Of The Biggest Bull Markets In The Oil Market.
Apr 16, 2018

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Recently, brent futures began to show a "backwardation", in which crude oil futures traded higher than forward futures.

This is the first spot premium in years, and most analysts see it as a signal that the oil market may finally be close to rebalancing.

In the past few years, when the oil market collapsed, the backwardation was accompanied by a rebound.

Over the same period, the contango (the reverse of the backwardation) tends to emerge from the market collapse caused by oversupply.

There are usually several reasons for the rise in backwardation.

A fall in the futures curve would make it less economical to store crude oil, so the spot premium could accelerate inventory decline.

The trend also complicates the hedging strategies of shale producers, which in turn constrain their expansion plans.

That, too, is a symptom of a short-term tightening in the oil market.

What is certain, however, is that it can only reflect an expectation that the oversupply will reappear at some point in the future.

However, the backwardation usually occurs when other indicators start to appear.

Inventories of domestic crude have fallen sharply in recent months, with inventories falling by more than 60 million barrels since march.

The international energy agency (IEA) and the organisation of the petroleum exporting countries (OPEC) have each raised their estimates of demand for crude oil.

OPEC also said: "the global economic growth has gained momentum, with the momentum of economic growth, growing expectations in the second half of 2017 oil demand will also dynamic growth, and demand for crude oil market will still have upside."

And Wall Street has become more optimistic.

In recent weeks, hedge funds and other fund managers have accumulated a large number of long positions.

According to data released by the British financial times, in the week ended Aug. 8 investors bullish positions for brent crude has reached 58 million barrels a day, this is the biggest weekly gain since December last year.

Standard chartered bank global commodity, head of research at Paul hoss, in an interview with the British financial times (Paul Horsnell) said: "if investors can get more robust data every week, it is hard to appear positive negative impact."

However, he added: "there is still resistance to price increases because the market is reluctant to push crude prices too high."

In fact, few crude oil prices exceed the prospect of more than $50 a barrel.

No one would even believe that the oil market is suffering from a supply crunch.

At the moment, oil production in each member country is at its highest level since 2017, and production of us shale producers is on the rise.

By the end of this year, some of the long-term planning projects will be in places like Canada and Brazil.

"The oil can be incorporated into the market, so prices will have to be given at some point," dei-michei, of JBC Energy, told the financial times.

Such bullishness cannot last.

In fact, investor volatility is a pendulum swing, and a very typical one.

For the first time this year, the oil futures market has been bullish, but it has been offset by shifts in investor sentiment and led to a sharp fall in the price of crude oil.

Happened after June prices tumbling, hedge funds and other fund managers to take short positions are excessive increase, eventually leading to short be liquidated and the bullish bets with crude oil prices rebound again.

All this suggests that the recent shift in investors' long-term bets on oil futures is likely to keep crude prices from going too far.

Nor is the market fundamentals proving the likelihood of a big price rise, at least for now.

"Rebalancing is a very stubborn process," Neil Atkinson, head of the IEA's market and industry sector, told bloomberg when it came to OPEC's production cuts.

In short, the spot premium in the oil futures market suggests that the balance of supply and demand is moving in the right direction, which could temporarily keep prices at their lowest levels.

But that does not necessarily mean oil prices will exceed $50 a barrel in the short term.