Extreme Backwardation Suggests One Of The Tightest Oil Markets Ever

Authored by Tsvetana Paraskova via OilPrice.com,

• Oil futures are seeing the steepest backwardation in history, suggesting we are witnessing one of the tightest oil markets ever.

• While oil prices fell on Thursday morning due to rumors of an Iran nuclear deal coming to fruition, the near-term oil market will remain very tight.

• The price of Dated Brent physical cargoes traded in the North Sea hit $100.80 per barrel on Wednesday, the first time Brent exceeded $100 since 2014.

The oil futures curve is in such an extreme backwardation that it suggests the oil market is very tight right now, despite Thursday’s move lower after Iran said that a possible nuclear deal was “closer than ever.”

Brent oil prices fell early on Thursday to below the $93 mark, after Iran’s main negotiator, Ali Bagheri Kani, tweeted late on Wednesday:

“After weeks of intensive talks, we are closer than ever to an agreement; nothing is agreed until everything is agreed, though. Our negotiating partners need to be realistic, avoid intransigence and heed lessons of past 4yrs. Time for their serious decisions.”

In case a deal is indeed reached – and the U.S. has said that the window of reaching an agreement is closing fast – Iran could return some 1.3 million barrels per day (bpd) to the market within several months after the U.S. lifts sanctions on its oil exports.

This, of course, is still in the realm of possibility, but the immediate signals reflected in the futures prices are shouting that the market has rarely been so tight.

Some of the futures spreads are in their steepest backwardations in history, according to Bloomberg.

The price of Dated Brent, physical cargoes traded in the North Sea, hit $100.80 per barrel on Wednesday. That was the first time Dated Brent has exceeded the $100 a barrel threshold since September 2014. The jump in physical cargo prices suggests that traders are willing to pay $100 per barrel for actual crude supply right now in a sign of a very tight market, Bloomberg notes.

“The only way to balance this market over the medium term remains high oil prices to slow demand growth,” analysts at Energy Aspects wrote in a note to clients cited by Bloomberg.

Meanwhile, crude stocks at Cushing, Oklahoma—the designated delivery point for WTI Crude oil futures contracts—dropped by another 1.9 million barrels, to stand at just 25.8 million barrels as of February 11—the lowest level since 2018.