US oil futures forward structure reflects doubt over OPEC restraint

NEW YORK, Nov 7 (Reuters) – The forward curve for US oil futures has steepened in recent days as worries that proposed OPEC supply cuts won’t hold, or even materialize, turned the market’s outlook for 2017 deliveries more bearish relative to longer-term contracts.

With the Organization of the Petroleum Exporting Countries dragging out negotiating the terms of a production cap, traders are now betting that a supply glut that has depressed crude prices this year will take longer to alleviate than previously anticipated, due to disagreements among OPEC members.

This is reflected in the prices for all futures months comprising the forward structure for West Texas Intermediate (WTI) crude, which is the U.S. benchmark, while Brent crude is the global benchmark.

The 2017 calendar strip, representing an average price of the 12 contracts expiring during the year, fell to a two month low of $47.81 on Friday as squabbling seemed to return after the countries agreed tentatively in September to limit output. On Oct. 10 the 2017 strip reached its highest in more than eleven months at $54.28.

Meanwhile, the 2018 strip dropped on Friday to its lowest since September 2, but has not sold off as much, holding just above $50 a barrel.

Front-month US oil futures on Friday closed at $44.07 a barrel, the lowest since Sept. 20 and down 16 per cent from a 15-month high near $52 a barrel in October. On Monday, the contract settled at $44.89 per barrel.

Friday’s fall came after Reuters reported that Saudi Arabia, the world’s largest crude exporter said it would boost production if OPEC rival Iran did not agree to limits.

This could increase pressure on U.S. oil producers, who have expanded drilling programs for next year, betting on higher prices, said Vikas Dwivedi, global oil and gas strategist at Macquarie.

“I’m a little bit concerned with the way market structure has been moving the past couple of days,” said Michael Cohen, oil analyst at Barclays.

Prices for crude delivered in December 2017 are lower than futures for December 2018, a structure known as “contango.”

The differential increased to its widest since late September at $1.89 on Friday. On Oct. 11 that spread was its narrowest since late June at 77 cents. The December 2016 discount to December 2017 increased to $5.20 on Friday, the biggest on record.

Saudi Arabia has increased output since 2014 to record highs of around 10.5 million-10.7 million barrels per day and if it increases production in the absence of a deal, that would only worsen the global glut.

So, $40 a barrel for front-month futures is seen as a growing possibility for January. Open interest in $40 put options – contracts essentially betting on the price falling further – maturing in Jan rose to a record high last week.

The market’s balance, and consequently the outlook for U.S. producers, continues to depend upon an OPEC agreement at the end of November. Until then, and since many U.S. producers have locked in hedges that allow them to continue production through 2017, traders expect that oversupply may continue to weigh on the market.

“If no agreement is reached I sense the market will lose more confidence and we could have prices dip into $40 or below by the end of the year,” said one broker in the U.S. crude market.

OPEC Secretary-General Mohammed Barkindo on Monday reiterated the cartel’s commitment to a deal.

(Reporting By Jessica Resnick-Ault; Editing by Alden Bentley)