Oil traders eye signs of the end of supply glut

Oil investors are finally buying into the notion that the biggest risk to the price now is supply falling short of demand, rather than from any stubborn overhang of unwanted crude, the options market shows.

The price of Brent crude has hit $52 a barrel, virtually double January’s near-13-year lows, driven primarily by a decline in global production that has been speedy enough to bring supply and demand into line faster than many had anticipated.

“In the end, you will see global over-supply, at some point diminish, and in effect even earlier than speculators realise,” ABN Amro chief energy strategist Hans van Cleef said.

In the last year, nearly a million barrels per day have vanished from higher-cost US output, a key contributor to the surplus that built up since the Organisation of the Petroleum Exporting Countries voted in late 2014 to sacrifice price strength for market share.

Coupled with that, unplanned outages, from wildfires in Canada, to violence in Nigeria and political or economic unrest in Venezuela and Libya, have reached their highest in five years, taking as much as 4m barrels a day offline last month.

The skew has now shifted to unprofitable, or out-of-the-money, put options maturing almost a year out, for the first time since 2014.

This switch would suggest investors are a lot more confident about the prospect of a more sustained rally.

“It’s part of that switch from moving from pricing inventories being accumulated to trying to price up how fast inventories will be run down,” said Paul Horsnell of Standard Chartered.

* Reuters