Interest in the narrowing contango and its possible causes have been growing in the past few weeks, and the IEA on Friday looked at the subject – and the question of whether tighter prompt markets or “less alarmist views on the future” are responsible.
The answer they say, is likely both – going on to point to several fundamentals that could reasonably be driving both ends of the market – of which small signs of an OECD demand floor was just one.
From the report:
As we discuss in this month’s report, tighter Canadian crude supply into the US midcontinent helps explain stronger prompt WTI prices. Floating storage is coming down, and there are fledgling signs of resurgent industrial activity, which could even put a floor under moribund OECD oil demand. Petrochemical sector re‐stocking may translate into higher diesel demand as goods move to domestic and export markets.
Ever‐present geopolitical risks also moved centre‐stage in recent weeks, helping lift the front end of the curve, amid concerns on Iran, Nigeria, Iraq and the Malacca Straits. But perceptions may be subtly changing for the medium and longer term. Despite many investment barriers, a shift in expectations on supply may be emerging. If a more open investment policy in Iraq yields real capacity gains (a very big “if”), producers like Iran and Venezuela may have to relax investment terms if they are to retain clout within the ranks of OPEC.
So, no sign of longer-term changes being introduced by financial oil market traders? No, in fact the IEA reiterated comments it made after an oil price meeting in Tokyo last month – that all agreed on the need for better data; and that regulation must take liquidity and hedging needs into account. And, furthermore:
Clearer internationally agreed policy on access, end-user prices and environmental and efficiency targets would prompt rational investment decisions by producers and consumers. Forecasters need to clearly acknowledge outlook uncertainties, and highlight alternative scenarios. The inevitability of ever-tightening markets may not be set in stone.
It’s not a huge shift for the organisation, which is particularly wary of simplistic arguments that speculators are driving price rises, and last August warned that mismatches between the US and UK regulatory regimes could distort the market.