Tags: Oil | market | Prices | long-term

Oil Market Starts to View Lower Prices as Long-Term

Thursday, 02 October 2014 06:06 PM

As near-term oil prices have slid over the past three months, long-term crude oil prices resisted, holding firm in an apparent sign that weak market conditions may not last long.

That is, until this week.

Over the past few days, long-dated futures for 2017 and beyond have tumbled in tandem with prompt contracts, a shift that suggests more market participants are betting the current global oversupply may last for some time.

From the oil price peak in late June through a week ago, December 2014 Brent fell nearly $15 a barrel while December 2017 eased only $3 a barrel. But over the past five days, both prices have tumbled in lockstep, dropping by as much as $4 a barrel.

"The backs may finally be realizing that this situation could last for years," a crude trader said.

The trend in U.S. markets is similar if less pronounced. December 2014 fell from near $103 a barrel in late June to around $91 a week ago; the 2017 contract barely budged, moving from $88.50 to $87.50 a barrel by Sept. 22. However, December 2017 on Thursday slumped to around $84 a barrel. December 2014 rebounded from its lows to close at $90.

Trading volume has spiked, with December 2017 hitting a record 6,800 lots on Thursday, four times above average. Over the previous two days volume was twice as high as normal.

Oil traders said it was premature to draw any definitive conclusions from the abrupt downturn in long-dated contracts, which tend to be thinly traded and thus more volatile.

The move may be due, in part, to hedge fund redemptions at the quarter's end, according to analysts. Particularly for bullish funds that may have underperformed in the worst quarter for commodities in three years, cutting long-range positions may have been required to meet investor withdrawals.

The analysts declined to name the funds that had staked out the positions. Bullish funds include Astenbeck Capital Management, which said earlier this month that it has kept core positions even while taking profits on some long-dated oil prices.

Forward hedging by producers may have contributed. After WTI fell below $90, automatic mechanisms for selling long-dated futures may have been activated, one market participant said.

Short-term factors are also driving headline oil prices, with supply from the Middle East remaining largely unhindered by violence there and economic data from Europe and Asia hinting at weak demand.

European benchmark Brent hit its lowest level since June 2012 on Thursday.

But the retreat in long-term prices may spur more debate over whether the boom in U.S. shale oil production is being priced more deeply into the market, convincing long-term traders that abundance, not scarcity, may be the new normal.

The unyielding growth in shale output, coupled with major strides in vehicle efficiency that will cut deeply into demand, may be changing longer-term views.

A month ago, Andy Hall, Astenbeck's manager, said his $3.3 billion fund had cut risk, taken profits and shifted more holdings into cash due to market ructions. But even then, he said his biggest holdings remained U.S. oil contracts for 2017 and beyond.

People who were betting against the spread may be short-covering, he said. "Even though the backwardation move in WTI is now pronounced, you wouldn't expect that to be evidence" in the long-distant contracts, he said.

Since mid-June, backwardation between WTI futures for December 2014 and December 2017 has disappeared, to where December 2014 was only $3 a barrel over 2017, which may have triggered some short covering, he said.

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As near-term oil prices have slid over the past three months, long-term crude oil prices resisted, holding firm in an apparent sign that weak market conditions may not last long. That is, until this week.
Oil, market, Prices, long-term
Thursday, 02 October 2014 06:06 PM
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