As oil prices near 2 – year high WTI enters backwardation

by | November 23, 2017 1:35 am

Oil rose to its highest level in 2 years on Wednesday, after United States industry data showed crude stockpiles resumed declines and as investors await a decision by Organisation of Petroleum Exporting Countries (OPEC) on extending output cuts.
West Texas Intermediate (WTI) for January delivery gained as much as $1.22 to $58.05 a barrel on the New York Mercantile Exchange, and was at $57.81 as of 12:04 p.m. London time, according to Bloomberg data.
The front-month contract for WTI is trading at a premium to all the other longer-dated futures for the first time since November 2014.
This market structure, known as backwardation, typically indicates strong demand and tight supplies.
Dolapo Oni, head of research at Ecobank said “The oil market occasionally goes into backwardation when prices are really high, so from 2014 till now we have being experiencing a contango.”
With this development, Nigeria is expected to see oil revenue increase, at least in the medium term, giving Africa’s largest oil producer a better chance of implementing its record N8.6 trillion budget planned to boost economic growth.
“It’s good news for Nigeria, because the 2018 budget production assumption is at 2.3 million barrels daily, so there is every likelihood that the government will likely meet its estimated revenue for oil unless OPEC asks for an output cut which seems unlikely,” said Oni.
Brent for January settlement increased 57 cents, or 0.9 per cent, to $63.14 a barrel on the London-based ICE Futures Europe exchange after climbing 0.6 per cent on Tuesday.
Oil headed for its highest close since June 2015 while trading volume surged after U.S. industry data showed crude stockpiles resumed declines and as investors await a decision by OPEC on extending output cuts.
On the direct implication of backwardation, Oni explained, “it depends on who you are in the market, if you are a trader, its better you sell, because there is no incentive to store oil, since oil price is as high as it could be both in short and long term, for oil companies, you can hedge part of your production to protect against future decline, or also ramp up production to have revenue.”
According to OPEC, Nigeria’s oil production as at October was 1,738 million barrels per day, while Saudi Arabia has been reducing its export and production in order to curtail the oil glut.
OPEC is scheduled to meet next week to decide on the extension of supply cuts.
Meanwhile Trafigura Beheer BV (TBBV), a company legally incorporated and resident in the Netherlands has said it lifted crude oil valued at $133.09 million from Nigeria in 2016 and remitted same amount to the Federal Government.
In its 2017 responsibility report released yesterday, the oil company said it lifted 2,947.31 barrels per day in 2016, against 20,751.93 barrels per day it lifted in 2014 and the company puts the total volume of lifting within the period at 400,790 barrels.
Bearish crude oil prices along with the threat of militancy saw Nigeria’s crude production fall to nearly 1.2 million barrels in the second quarter of 2016 affecting volume output from the oil companies.
In January this year, Trafigura was among 39 companies announced as winners of the 2017/2018 crude oil term contract, for the purchase and lifting of Nigeria’s crude oil from the Nigerian National Petroleum Corporation (NNPC).
By the terms of NNPC’s swap agreement with Trafigura, it will charter vessels for the purpose of delivering refined products to the NNPC and take delivery of the corresponding swap of crude oil at the designated ports.