Oil Market Backwardation and Medium-term Prospects

The start of 2022 turned out to be extremely successful for the oil market (since the beginning of the year, oil has added about 20%). Although many predicted that the market would go from deficit to surplus by this time, apparently this has not yet happened.

At least, the presence of backwardation in the oil market speaks in favor of this. Recall that backwardation is a situation in the futures market, in which prices for goods with immediate delivery are higher than quotations for futures contracts, and prices for futures with short terms are higher than quotations for distant positions.

So yesterday, with the spot price of oil on the market around 93, the nearest futures (March 2022) were quoted at 91.7, April - at 90, and May in general at 88.50. What does it say? The fact that here and now there is not enough oil and buyers are ready to overpay.

We already wrote that one of the reasons for this state of affairs was the inability of OPEC + to fully fulfill its obligations to increase oil production. Plus the energy crisis, plus the winter, plus the growth in demand. In general, almost everyone needs oil here and now.

Nevertheless, speaking about the prospects, we continue to believe that oil sales are an excellent medium-term (from six months to a year in position) deal. OPEC+ has been increasing production by 400K b/d every month since August, albeit nominally in places. In the US, the number of active oil installations (the number has almost tripled since pandemic lows) and production (rose from 10 million in September 2020 to 10.7 million at the start of 2021) are growing and are doing it more and more actively as prices rise. Negotiations on a nuclear deal with Iran are ongoing and the US even plans to lift some of the sanctions.

The recovery in demand is nearing completion, and the immediate future of the global economy does not look all that bright. Yes, and the energy crisis as the winter ends and the growth of gas transit from Russia will clearly decrease in scale.

In general, the current prices look like a great opportunity to sell at a higher price.