- The Forward Brent curve has become anchored at current marginal cost of getting an extra barrel to market (plus margin)
- The step-change up for oil caused by a supply crunch is behind us
- Shorter-term Demand-Supply balances will have direct effects on the curve shape going forward
- For 2013/14 we see a supply overhang for crude oil and hence lower prices and lower spreads (see our article "I have too much energy" (Dec 21 2012)
___________________________________________________________________________________
The oil price used to trade below 20US$ for a very long time before cheap oil simply was not available any longer and demand growth was rising around 2.5mil b/d due to strong economic growth fuelled by debt expansion. During the time that the oil price was at these lower prices the forward curve ie the back-end of the curve was typically anchored between 18-20US$. It was anchored at these levels because that was the marginal cost of production to obtain an additional marginal barrel of oil.
When the cost of an additional barrel of oil began to increase the back-end of the curve began shifting higher. While current oil supply was fine and more than enough to satisfy current demand the back-end was indicating that there may not be enough oil to satisfy future demand. The curve shifted into a contango structure at that time and remained there while the oil price rallied high enough to curtail future demand and attract additional supply. A lot of commodity traders/investors were perplexed by this as they had associated contango curves with an oversupply of crude oil, which only held true if the forward curve was in equilibrium.
Now we have arrived at a new stage of the commodity super-cycle as a lot of oil is being found and coming on-line at these higher prices. Shale oil is viable at these prices, so is deep sea oil. To name a few places of new or increased oil production: the US is producing around 1mill b/d extra oil per annum (shale oil), oil reserves have been found in the China Seas, shale programmes are being planned and implemented in europe, china and australia, even classical oil producers are now ramping up production levels such as Iraq.
Looking at the forward curve of Brent (the world benchmark, since WTI has its own problems) we see that from December 2015 onwards the oil price is in the mid 90's$, which is in line with the marginal new cost of oil production which is estimated at around 80-85US$. Adding a 15-20% profit margin brings us to the mid 90's, exactly where the forward curve is anchored. Hence we see the oil market normalising at these higher levels with the forward curve once again indicating a marginal cost plus profit margin pricing.
Without an external wild card materialising like an Iranian war or supply outages we can expect that we are going to be trading at these levels for the foreseeable future. Please refer to our article "I have too much energy" (Dec 21 2012) for reasons why we see 2013 demand-supply balances pointing to lower prices. Given the above description of the forward curve we should reasonably expect spreads to be falling.
Looking at the forward curve of Brent (the world benchmark, since WTI has its own problems) we see that from December 2015 onwards the oil price is in the mid 90's$, which is in line with the marginal new cost of oil production which is estimated at around 80-85US$. Adding a 15-20% profit margin brings us to the mid 90's, exactly where the forward curve is anchored. Hence we see the oil market normalising at these higher levels with the forward curve once again indicating a marginal cost plus profit margin pricing.
Without an external wild card materialising like an Iranian war or supply outages we can expect that we are going to be trading at these levels for the foreseeable future. Please refer to our article "I have too much energy" (Dec 21 2012) for reasons why we see 2013 demand-supply balances pointing to lower prices. Given the above description of the forward curve we should reasonably expect spreads to be falling.
Disclaimer: This posting is for information purposes only and is not intended as an offer,recommendation or solicitation to buy or sell, nor is it an official confirmation of terms. No representation or warranty is made that this information is complete or accurate. Any views or opinions expressed do not necessarily represent those of Archbridge Capital AG. This information is not intended, tax or legal advice. You also acknowledge that the information should not be construed as a solicitation or offer by Archbridge Capital AG to buy or sell any securities or any other financial instruments or provide any investment advice or service. Unless otherwise stated, any pricing information given in this posting is indicative only, is subject to changes and does not constitute an offer to deal at any price quoted. You should be aware that returns can be volatile and you may lose all or a portion of your investment. Past performance of any investment or trading tool is not necessarily indicative of future performance or results.