Crude traders expect the oil market to begin tightening and gradually move into deficit, but the shift is not forecast to occur much before the second half of 2017.
The expected timetable for rebalancing is revealed by the changing relationship between Brent futures prices for different months in 2017 and 2018.
Holbrook Working of Standard University’s Food Research Institute explained the relationship between stocks and futures prices over 80 years ago (“Price relations between July and September wheat futures”, 1933).
Traders’ expectations about the balance between supply, demand and stock levels are reflected in the shape of the futures price curve.
If supply is expected to exceed demand, and stocks are high and rising, futures prices will normally trade in a structure called contango, with prices for nearby delivery dates below those for later delivery months.
Discounts for nearby delivery months reflect the cost of financing and storing excess stocks until they can be resold and consumed at a later date.
But if demand is expected to exceed supply, and stocks are low and falling, futures prices will normally trade in the opposite structure, known as backwardation, with nearby prices above those for later delivery.
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