The Oil market backwardation has narrowed significantly over the past month and the forward discount on oil is now at the lowest level since 2012.
Libya’s imminent return to the market as well as the insurgence in Iraq have been key forces stirring up the market.
The move has been passed on to oil product curves as well as base metal curves.
For some time now the oil market forward curve has mainly been driven by movements in the front end of the curve. Most recently the Iraqi insurgence pushed the oil price to the highest level in nine months. However, concerns over the unrest quickly eased and the price fell back again. The drop was further exacerbated by the news that Libya after a year of shutdown looks ready to restart exports.
The back end of the curve has been well anchored below USD100/bbl over the past year but since worries spurred over the uncertain situation in Iraq, the two-year point on the curve has been left above this level despite the front end falling back. Consequently, the backwardation in the oil market has narrowed significantly – the oil market has been in backwardation more or less the entire period since the beginning of 2011.
The two-year forward discount in the oil market is presently at the lowest level since mid- 2012 – currently it is around USD5/bbl. This means that another strong pull down in the front end may move the oil market into contango. A near-term deal on Iran’s nuclear programme that lifts sanctions on Iran could be that trigger. In this research paper we take a closer look at the forces currently shaping the crude oil forward curve.
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