Crude Traders Expect Energy Market Rebalancing in 2H of 2017

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.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza