Market Overview

19 June 2020

Oil Is Being Pulled Up by Backwardation and the Chinese Economy Recovery

Oil prices for the Brent crude benchmark extracted in the North Sea moved above the technical resistance of $42 per barrel today. It happened for the first time since June 10, and the prices are now approaching the three-month peaks that were seen immediately after the summer extension of the global deal by most of the exporting countries.

From the stock markets side, commodity prices are partially supported by the moderate positive sentiment both in the U.S. and Europe, although without a wild bullish rush, but also without an explicit urge for deeper corrections. Mr Yi Gang, who is the Governor of the People's Bank of China (PBoC) declared on Thursday that China’s economic fundamentals remain sound to the extent, when the regulator considers the timely withdrawal of its stimulative policy tools in advance. “The financial support during the epidemic response period is (being) phased, we should pay attention to the hangover of the policy,” Yi Gang said. He clearly mentioned that the economy has been recovering steadily after shrinking 6.8% in the first quarter, which is not such a large number if compared with many other developed countries.

At the same time, China will keep liquidity at an ample size in the second half of the year as new loans are likely to hit nearly 20 trillion Yuan ($2.83 trillion) this year, up from a record 16.81 trillion Yuan in 2019. Total social financing could increase by more than 30 trillion Yuan, the governor said. The bank’s balance sheet remains stable around 36 trillion Yuan. A balanced policy supports the Chinese manufacturers, which means it indirectly sponsors the continuing replenishment of oil reserves of country's enterprises which still has relatively cheap fuel. While giving out monetary support with both hands, officials verbally signal that the economy will continue to recover at a good pace, while also giving unwitting support to the prices.

It is noteworthy to mention that Brent prices moved into backwardation on Thursday for the first time since early March with the August contract rising to nine cents above September LCOc1-LCOc2 on Friday. Backwardation is a kind of market paradox, which occurs when near-term contracts are trading at higher prices than outer months’ contracts. This may indicate an increased demand at the moment, and therefore a possible readiness for further price growth. Before that, worries about storage capacity had sent the market into steep contango, as wide as $5. Contango market structure means the vice-versa situation when outer months’ trade are at higher prices than the nearest contracts. This previous contango situation meant that investors believed in low prices at that moment, and higher prices were not expected any time soon. And now the situation has changed for the better, but of course, no one knows how long this will last.

CMC Markets chief strategist Michael McCarthy pointed to a fundamental resistance point in the WTI contracts between $40 and $41, as he supposed more US shale producers may revive shut-in wells with higher price levels. The Baker Hughes oil rig count dropped from 682 in the beginning of March to the current 199 units, and updated American shale industry statistics will be released today at 17:00 GMT. The active rig count acts as a leading indicator of demand for oil products, and the better the market situation, the more rigs are functioning. But as the number of units increase, an oversupply maybe caused, naturally limiting fuel prices.

Assessments of the situation by member countries of the OPEC+, which is the informal group of The Organisation of the Petroleum Exporting Countries (OPEC) and its allies, may vary. On Thursday, a panel of the OPEC+ group representatives left the door open for extending or easing existing cuts after July, while pressing a number of countries to improve their compliance of the deal. In particular, the commitment of Iraq and Kazakhstan to make up for overproduction in May on their supply cuts in the following months supported the market. Kirill Dmitriev, head of The Russian Direct Investment Fund (RDIF), which is a major state sovereign wealth investment fund in the country, just told RBC Daily newspaper in Moscow that: "With global economies and oil demand recovering, there is no point in extending oil output cuts led by OPEC and other producers. We already see that economies have started to emerge from the coronavirus and markets are recovering, supporting oil demand, so there is no point to extend strict curbs for longer than a month (through July)."

But it would be too unambiguous to assume that such statements clearly play on the negative side of the oil market. Indeed, the more export volumes removed from the market, the less supply exceeds demand, but the excessive willingness of exporters to sacrifice their production levels could also be a sign of market weakness. The readiness of some countries to face the question head-on and to gradually increase production quotas indicates normalisation. OPEC and its allies are currently cutting output by a record 9.7 million bpd, and that is as much as 10% of the global supply. They did this after oil demand plunged by up to a third at the bottom point. Current plans of oil exporters include the step-by-step decline of the cuts, at first to 7.7 million bpd from August, staying at that level until the end of 2020.


Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.


Open Forex Demo Account
I understand and accept the Privacy Policy and agree that my name and contact details can be used by TeleTrade to contact me about the information I have selected.
37 International Awards
Have a question?

We are ready to assist you in every step of your trading experience
by providing 24/5 multilingual customer support.

Follow us

Risk Warning: Trading Forex and CFDs on margin carries a high level of risk and may not be suitable for all investors. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73.55% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Prior to trading, you should take into consideration your level of experience and financial situation. TeleTrade strives to provide you with all the necessary information and protective measures, but, if the risks seem still unclear to you, please seek independent advice.

© 2011-2020 TeleTrade-DJ International Consulting Ltd

TeleTrade-DJ International Consulting Ltd is registered as a Cyprus Investment Firm (CIF) under registration number HE272810 and is licensed by the Cyprus Securities and Exchange Commission (CySEC) under license number 158/11.

The company operates in accordance with Markets in Financial Instruments Directive (MiFID).

The content on this website is for information purposes only. All the services and information provided have been obtained from sources deemed to be reliable. TeleTrade-DJ International Consulting Ltd ("TeleTrade") and/or any third-party information providers provide the services and information without warranty of any kind. By using this information and services you agree that under no circumstances shall TeleTrade have any liability to any person or entity for any loss or damage in whole or part caused by reliance on such information and services.

TeleTrade cooperates exclusively with regulated financial institutions for the safekeeping of clients' funds. Please see the entire list of banks and payment service providers entrusted with the handling of clients' funds.

Please read our full Terms of Use.

To maximise our visitors' browsing experience, TeleTrade uses cookies in our web services. By continuing to browse this site you agree to our use of cookies. You may change your cookie consent or view our cookie declaration here.

TeleTrade-DJ International Consulting Ltd currently provides its services on a cross-border basis, within EEA states (except Belgium) under the MiFID passporting regime, and in selected 3rd countries. TeleTrade does not provide its services to residents or nationals of the USA.

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73.55% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.