Current crude oil prices appear to be in line with market fundamentals, to the evident frustration of Saudi Arabia and its OPEC+ partners trying to push them higher, which suggests their efforts may be in vain for now.
Despite multiple rounds of OPEC+ production cuts since the fourth quarter of 2022, global petroleum stocks are close to the long-term average, while futures prices and calendar spreads are only slightly below average.
Commercial inventories of crude and refined products in the countries of the Organization for Economic Cooperation and Development (OECD) totalled 2,841 million barrels at the end of October 2023.
OECD commercial stocks were just 19 million barrels (-1% or -0.13 standard deviations) below the ten-year seasonal average, with the deficit narrowing from 218 million barrels (-8% or -1.36 standard deviations) in March 2022.
Production restraint by Saudi Arabia and its OPEC⁺ allies has been more than offset by output growth from U.S. shale firms and other sources as well as softer growth in consumption.
With inventories almost exactly in line with their long-term average, futures prices would be expected to be near to their long-term average as well, which has been the case.
Front-month Brent futures averaged $89 per barrel in October 2023, in the 58th percentile for all months since the start of the century, and only slightly above the long-term average of $82, after adjusting for inflation.
Since then, front-month prices have fallen to an average of $76 (42nd percentile) so far in December 2023 as traders anticipate the market will be over-supplied with inventories rising in the first few months of 2024.
The slump in prices has been accompanied by a breakdown in the calendar spreads, as traders anticipate crude will remain readily available, replacing earlier fears about shortages.
Brent’s six-month spread has fallen into an average backwardation of 26 cents per barrel (also in the 42nd percentile) from more than $5 (96th percentile) in September 2023.
While prices are understandably disappointing for producers hoping to be rewarded for production cuts, they are not obviously out of line with a market that remains comfortably supplied with plentiful inventories.
John Kemp is a Reuters market analyst. The views expressed are his own. Follow his commentary on X.
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