By John Kemp
LONDON – Oil prices have fallen back after a brief spike triggered by the surprise production cuts announced by Saudi Arabia and other members of OPEC+ on April 2.
Front-month Brent futures finished trading at $81 per barrel on April 25, after hitting a high of $87 on April 12, though still up from a recent low of just $73 on March 17.
After adjusting for inflation, prices are in the 41st percentile for all months since 2000, down from a high in the 47th percentile two weeks ago, but still up from the 33rd percentile in March.
In real terms, prices have fallen almost 30 percent from the same month a year ago, as fears eased that Russia’s invasion of Ukraine and the sanctions imposed in response would disrupt global supplies.
Instead, real prices have come under pressure from concerns about slowing growth and increasing interest rates, with the decline consistent with a significant cyclical downturn.
As traders have become more confident about the continued availability of crude, Brent’s six-month calendar spread has slipped to a backwardation of $2.40 per barrel (77th percentile for all trading days since 1990).
The spread is down from a backwardation of $3.99 (92nd percentile) on April 12, though still up modestly from $1.13 (59th percentile) on March 20.
Futures prices are signalling a market slightly weaker than normal, while spreads are signalling the opposite, most likely because current consumption is slack but expected to bounce back later in 2023.
But prices and spreads are within the middle portion of their historical range and have changed only a little since before the cuts were announced by the Organization of the Petroleum Exporting Countries and other large producers led by Russia, a group known as OPEC+.
That does not imply the cuts had no impact; without them, prices and spreads would likely have fallen further as traders focused on the weakening industrial cycle.
But in the overall picture the unexpected cuts totalling more than 1 million barrels per day have been readily absorbed and had only a modest impact on the actual price level.
Volatility briefly spiked following the announcement, but has since retreated near to its long-term average, showing most of the financial impact has been absorbed.
There has been more of a lasting impact in the physical market, given the significant withdrawal of barrels from the market in the near term.
The five-week dated Brent spread is still in a backwardation of $1.18 (86th percentile) up from a contango of 60 cents (20th percentile) on March 17.
