Oil traders are betting that in the long term, oil prices may rise sharply due to a lack of investment in future supplies.
In other words, most of the producers have missed the lesson of this autumn and are avoiding signing contracts for the supply of oil.
The market does not want oil futures at 70. Analysts promise 100 oil to the dissenters
In fact, they can be understood – at today's prices, it is not profitable to buy and conclude contracts. In the spring, the market will roll back in any case, and then futures will become cheaper.
But the buyers' calculations may not be justified.
And yet, since reaching a one-year high last month, the most active oil futures have already fallen by almost 5%. For comparison, prices at the end of 2022 and 2023 remained virtually unchanged, remaining above $70 per barrel.
Economists noted that nearby contracts are being reshaped by US efforts to increase supply, as well as a potential negative reaction from OPEC +, so more distant contracts are being strengthened by a reduction in production investments and a shortage of producers selling deferred futures to fix their future sales.
For most of the last two months, the market has been approaching the point of super backwardation - the industry is talking about a steep descent of the curve indicating limited supply. But in recent weeks there has been a shift smoothing out this structure, as traders are betting that steady demand and falling investment in new supply will keep the market more tense for a long time.
"I think forward oil prices will be higher than spot prices," said Marwan Younes, a commodity markets specialist. "The world can decarbonize, but it is easier to block oil sources than demand. You will see that prices will rise higher than in a situation of normal hedging of producers."
These opinions echo the comments of officials of some of the world's largest banks and trading houses over the past few weeks.
During this period, US President Joe Biden led global efforts to release strategic oil reserves, which finally happened on Tuesday. The market is now waiting to see what OPEC and its allies will do in response at a meeting early next month, so the contracts are suspended.
As a result, the slowdown in spending growth is reflected in industry indicators.
Thus, the number of drilling rigs for oil and gas production around the world has decreased by about 30% compared to the pre-pandemic data.
At the same time, according to Vitol Group, demand has recently returned to the pre-pandemic level, and a number of other major traders have estimated demand in about the same way.
Trafigura Group, one of the world's largest commodity trading houses, reported that prices for December 2022 and 2023 are still quite low and amount to about $70 per barrel, while in the future prices may reach $100.
Of course, deferred prices matter because they affect the pace of spending on future supply.
Are you alive, OPEC?
Nevertheless, supporting theories of an impending supply shortage (and concern in the market has persisted for several years) is fraught with financial risks.
According to Greg Sharenov, given that demand growth will decrease by the end of the decade, OPEC and its allies may decide to try to extract more oil earlier in order to maximize their resources while demand is still high. That is, to follow the example of this summer by increasing the quota for the UAE.
"If you live in a world with slowing demand growth, especially for refined crude oil, the assumption that OPEC+ members are not reconsidering their approaches to their reserves may let you down over time," Greg said. However, "as investments in long-term assets become more complex, they can potentially be optimistic for the price," as the risks of investing in assets in the long term become more difficult to assess, he added.
Of course, potential optimism is a fairly streamlined concept for making financial decisions. But bullish sentiment is also associated with hedging by oil pumping companies.
Since crude oil prices have risen by 60% this year, producers are steadily reducing their hedging portfolios, believing that they are fully insured by the general upward trend of the market, but at the same time exposing themselves to risk in the event of a market fall.
So, Pioneer Natural Resources Co. has stated that it will not create any hedges for the foreseeable future, while Continental Resources Inc. has also stated that it is largely hedged. And this is an impulse that is not limited only to US shale production. For example, North Sea producer Neptune Energy said it was also limiting its hedge fund.
As a result, traders face less pressure from sellers to buy on the downside of the oil price curve compared to the political price fluctuations that have dominated overall prices since late October.
"We really haven't decided anything with oil prices at $80," Goldman Sachs analyst Damien Kurvalin said in an interview with Bloomberg TV. "Oil is still not at the price that should balance this market over time."
But, perhaps, behind all these conversations there is an attempt to keep prices at a high level and force market players to work in a new price range. However, in the spring it may be too late for many manufacturers to sign contracts.