OPEC’s efforts to curtail supply and bring the global oil markets back into balance has started to materialise, with reported inventories moving closer to their five-year average. Brent futures have moved into backwardation, a situation where nearby contracts trade at a premium to later-dated ones, and generally the signal of a tightening market. While this change has been welcomed by investors, it has also helped a further drawdown in crude oil stocks by making crude storage temporarily unprofitable.
Markets have since remained bullish by building up long positions, expecting if not a dramatic increase, at least a stabilisation of global oil prices at slightly higher levels. In the meantime, a stronger demand outlook has facilitated the realignment of demand and supply fundamentals, also aided by higher exports of refined products towards non-OECD countries.
Recent weather perturbations in the United States have shown how quickly the demand for those products could shoot up in response to local disruptions. Worldwide downstream capacity might be challenged if refiners in the United States, in Europe or in Asia have to process significant volumes to meet increasing demand. Meanwhile, higher exports of relatively cheaper US sweet crude may not embellish the upstream supply picture either, especially if this entices US drillers to ramp up output again.