The Oil Market’s Mixed Price Signals
Recent movements in oil prices, time spreads, and physical differentials have been sending some mixed signals both about current and long-term market fundamentals. This may reflect heightened uncertainty as well as a wide divergence of expectations about key factors shaping the oil market, both in the short-term and the medium-term, including the size of potential output losses from Iran following the US withdrawal from the nuclear deal, how low Venezuelan oil production may go, whether OPEC+ will exit the deal anytime soon, the potential impact of the recent oil price increases on oil demand growth, and whether the market will face a supply crunch in the next couple of years due to lack of investment. Over time, some of these key uncertainties will be resolved and the price signals may converge towards a more ‘coherent’ story with movements in price levels, the back end of the futures curve, time spreads and physical differentials all pointing in the same direction. This, however, may take time and the adjustment mechanism remains unclear and so for now the various market players have little choice but to navigate through mixed price signals, some sharp disconnections between price levels, time spreads and physical differentials and between short-term and long-term expectations.