Most of the drop came from oil on water (down more than 50mb), but even on-land inventories fell by around 24mb. The strongly undersupplied oil market in August is the result of solid oil demand and lower supply from Saudi Arabia and the other OPEC+ countries over the recent months.
The market tightness is also visible in crude oil time spreads, which is the price difference between the first futures contract and the one of the subsequent months, with the futures curve now more strongly downward sloped (backwardation). Tellingly, Brent’s six-month contract is about USD 5/bbl cheaper than the first-month contract, up from a discount of USD 0–1/bbl during 1H23. This backwardation structure is likely drawing investors into oil, as they can benefit from rolling one contract to the next. Net length in Brent and WTI futures and options contracts has bounced to the highest level since November 2022 from extremely low levels in 1H23.
While we expect only modest upside from current prices, we reiterate our recommendations for risk-taking investors to add long exposure via first-generation indexes or longer-dated Brent contracts, or to sell Brent’s downside price risks.
Main contributor: Giovanni Staunovo, Strategist
Original report - Crude oil: The return of financial investors , 18 September 2023.