The GERM Report

-Demand signals are louder than COVID concerns.

-Russia looks set to end OPEC+ constraint.

The futures structure for Brent crude oil moved into slight backwardation in late Thursday trading after Iraq and Kazakhstan pledged to uphold their curtailment obligations to OPEC. Backwardation, where late-month contracts trade at a discount to the market, signals the oversupply concerns are gone and demand is back. Fuel storage levels offshore Asia are on the decline, while China is quick to build up its crude stockpiles. Russia, meanwhile, may again be playing spoiler, with its sovereign wealth manager saying there’s no need to extend OPEC discipline beyond next month.

The price for Brent crude oil was up 2.4% as of 8 a.m. ET to trade at $42.52 per barrel. That’s about 0.1% above the front-month contract and the premium suggests the market is tilting away from the supply-side threats that pulled US crude oil prices deep into negative territory in April. It is, however, quad witching day, which is typified by the simultaneous expiration of market index futures, stock futures, market index options and stock options. Backwardation could be influenced then by the coming expiration of the July contract for WTI, with trading volumes more dominant for August.

“This week’s crude price recovery was aided by a bunch of credible market voices saying oil demand has been rebounding faster than expected in June,” said Vandana Hari, founder and CEO of Vanda Insights, in a note emailed to The GERM Report. “The OPEC/non-OPEC alliance reminding the market of its new level of seriousness on enforcing compliance with production quotas was also a factor.”

Ship-tracking efforts from the Bloomberg news agency show some three dozen or so crude oil tankers parked offshore China. And according to energy data firm Kpler, China is expected to take in some 14 million barrels per day this month, a 20% increase from May. For fuels, the estimated 2.4 million barrels of gasoline stored offshore Singapore and Malaysia is finding a home as regional demand picks up. The OPEC+ focus on medium-sour grades, meanwhile, has put Brent at a discount to other grades, such as the Russian benchmark Urals. That’s created a rare incentive for French supermajor Total to buy up North Sea barrels.

“Fears about a resurgence of the coronavirus are taking a backseat to continued signs of rapidly improving demand and a commitment by OPEC cheaters to make restitution for past overproduction sins,” Phil Flynn at The Price Futures Group in Chicago wrote in his daily newsletter.

During a meeting Thursday with the committee monitoring OPEC+ compliance, laggards Iraq and Kazakhstan pledged to not only meet their obligations, but do more than expected to make up for their past lack of discipline. All told, that could signal that cuts from the group in July will be deeper than outlined in this year’s curtailment agreement. That sets Russia up to back away from long-term commitments.

“We already see that economies have started to emerge from the coronavirus and markets are recovering, supporting oil demand, so there is no point to extend strict curbs for longer than a month (after July),” Kirill Dmitriev, the head of Russia’s sovereign wealth fund, said.

Russia, before the depth of the demand destruction from the coronavirus pandemic was fully realized, argued early this year that low oil prices would take care of low oil prices. But its economy is on its back heels and the Russian Central Bank on Friday cut its key rate by 0.5 percentage points. Bank chief Elvira Nabiullina said Russia was not likely to see a positive reading for GDP until the first half of 2022. External factors such as geopolitical risk and pandemic recovery may be beyond Russia’s control.

“The low growth rates of the global economy is the economic reality which we will have to face for a long time ahead,” she said. “For Russia, this means a limited opportunity to expand its exports, including due to our commitments under the OPEC+ deal.”