The oil market is becoming extremely tight as consumption outstrips production, and traders expect it to tighten even further over the next six months.
The balance between production, consumption and inventories is intimately connected with the shape of the oil futures curve.
If consumption is expected to exceed production, and inventories are already low and falling, spot prices tend to trade at a premium to forward prices.
The premium for spot prices over forward prices, known as backwardation, acts as a signal to conserve remaining stocks as much as possible.
The premium for spot prices is intended to boost supply in the short term while encouraging consumers to defer purchases.
Backwardation is the most important and reliable signal of a tight and tightening oil market. Front-month Brent futures have recently been trading in a backwardation of more than $3.40 per barrel over the seventh-month contract. The current backwardation in Brent is among the most extreme in the last quarter of a century and in the 91st percentile of all trading days since 1992. If the backwardation was confined mostly to one or two months, it could be dismissed as an aberration or a sign of market manipulation.
But big backwardations are evident for all months through 2018 and 2019.
The increasing backwardation is consistent with statistics from the physical market showing oil inventories are becoming increasingly tight.
Stocks of crude oil and refined products in the OECD industrialised countries have fallen to just 43 million barrels above the five-year average, from a surplus of 340 million barrels at the start of 2017. If OECD stocks are adjusted for the rise in consumption, current inventories are now below the five-year average. Stocks are expected to decline even further in the second half of the year, which traditionally sees higher consumption.
Global oil consumption is expected to rise by more than 1.5 million barrels per day in 2018, mostly as a result of strong economic growth. Production from Venezuela is already falling. Traders are concerned about further output declines if the United States imposes sanctions on Venezuela and/or Iran. OPEC members have indicated they will not increase output before the end of the year, which will tighten the market further.
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The oil market is currently on an unsustainable trajectory, with global demand growth systematically outrunning supply. If something cannot continue forever, it will stop, according to Stein’s Law, one of the most fundamental constraints in economics, popularised by Herbert Stein, the chief economic adviser to President Richard Nixon.
Logically, there are five ways in which the oil market can be moved off its currently unsustainable course and brought back towards balance:
1. Slower consumption growth (in response to higher prices, an economic slowdown, or a combination of both)
2. Opec and its allies lift their output
3. Supply disruptions (existing and threatened) ease
4. US shale output increases even faster than expected
5. Non-Opec non-shale output increases faster than predicted.
The most likely path to rebalancing of the oil market is likely to involve a combination of some or all of these factors. Global consumption is sensitive to price changes, albeit the response tends to be slow at first before accelerating later, and is notoriously slow to appear in the statistics.
The relationship between prices and consumption is highly non-linear. The higher prices rise and the longer they are expected to stay high the bigger the eventual response from oil consumers. Experience suggests by the time “demand destruction” is evident in the data, the oil market will be well on its way to the next slump (this was true in 2007/08 and again in 2013/14). Some of the actual and anticipated supply disruptions may ease, especially if the rise in oil prices causes the United States to hesitate before imposing tough sanctions on Venezuela and Iran or to leave loopholes.
US shale output is likely to accelerate further in the second half of 2018 and into 2019: the number of rigs drilling for oil is rising again in response to the increase in prices. Escalating prices should also filter through into increasing exploration, production and development in the non-OPEC, non-shale sector.
Finally, Opec and its allies may decide to start lifting their production, via a formal decision or a decrease in compliance, before the end of 2018.
The oil market is already tight and on track to get tighter. The backwardation is high and could rise even further. But experience suggests such large imbalances between production, consumption and inventories are not stable for long.
Something will have to give soon. Supply. Demand. Or both.
Bloomberg
Ms Yang's top tips for parents new to the UAE
- Join parent networks
- Look beyond school fees
- Keep an open mind
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NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
Match info
Karnataka Tuskers 110-3
J Charles 35, M Pretorius 1-19, Z Khan 0-16
Deccan Gladiators 111-5 in 8.3 overs
K Pollard 45*, S Zadran 2-18
At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
A MINECRAFT MOVIE
Director: Jared Hess
Starring: Jack Black, Jennifer Coolidge, Jason Momoa
Rating: 3/5
In numbers: PKK’s money network in Europe
Germany: PKK collectors typically bring in $18 million in cash a year – amount has trebled since 2010
Revolutionary tax: Investigators say about $2 million a year raised from ‘tax collection’ around Marseille
Extortion: Gunman convicted in 2023 of demanding $10,000 from Kurdish businessman in Stockholm
Drug trade: PKK income claimed by Turkish anti-drugs force in 2024 to be as high as $500 million a year
Denmark: PKK one of two terrorist groups along with Iranian separatists ASMLA to raise “two-digit million amounts”
Contributions: Hundreds of euros expected from typical Kurdish families and thousands from business owners
TV channel: Kurdish Roj TV accounts frozen and went bankrupt after Denmark fined it more than $1 million over PKK links in 2013
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FIRST TEST SCORES
England 458
South Africa 361 & 119 (36.4 overs)
England won by 211 runs and lead series 1-0
Player of the match: Moeen Ali (England)
Result
2.15pm: Maiden Dh75,000 1,950m; Winner: Majestic Thunder, Tadhg O’Shea (jockey), Satish Seemar (trainer).
2.45pm: Handicap Dh80,000 1,800m; Winner: Tailor’s Row, Royston Ffrench, Salem bin Ghadayer.
3.15pm: Handicap Dh85,000 1,600m; Winner: Native Appeal, Adam McLean, Doug Watson.
3.45pm: Handicap Dh115,000 1,950m; Winner: Conclusion, Antonio Fresu, Musabah Al Muhairi.
4.15pm: Handicap Dh100,000 1,400m; Winner: Pilgrim’s Treasure, Tadhg O’Shea, Satish Seemar.
4.45pm: Maiden Dh75,000 1,400m; Winner: Sanad Libya, Richard Mullen, Satish Seemar.
5.15pm: Handicap Dh90,000 1,000m; Winner: Midlander, Richard Mullen, Satish Seemar
RESULTS
6.30pm UAE 1000 Guineas Trial Conditions (TB) US$100,000 (Dirt) 1,400m
Winner Final Song, Christophe Soumillon (jockey), Saeed bin Suroor (trainer).
7.05pm Handicap (TB) $135,000 (Turf) 1,000m
Winner Almanaara, Dane O’Neill, Doug Watson.
7.40pm Handicap (TB) $175,000 (D) 1,900m
Winner Grand Argentier, Brett Doyle, Doug Watson.
8.15pm Meydan Challenge Listed Handicap (TB) $175,000 (T) 1,400m
Winner Major Partnership, Patrick Cosgrave, Saeed bin Suroor.
8.50pm Dubai Stakes Group 3 (TB) $200,000 (D) 1,200m
Winner Gladiator King, Mickael Barzalona, Satish Seemar.
9.25pm Dubai Racing Club Classic Listed Handicap (TB) $175,000 (T) 2,410m
Winner Universal Order, Richard Mullen, David Simcock.
Paatal Lok season two
Directors: Avinash Arun, Prosit Roy
Stars: Jaideep Ahlawat, Ishwak Singh, Lc Sekhose, Merenla Imsong
Rating: 4.5/5
The specs
Engine: 2.0-litre 4-cylinder turbo
Power: 258hp from 5,000-6,500rpm
Torque: 400Nm from 1,550-4,000rpm
Transmission: Eight-speed auto
Fuel consumption: 6.1L/100km
Price: from Dh362,500
On sale: now
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Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia
BIO
Favourite holiday destination: Turkey - because the government look after animals so well there.
Favourite film: I love scary movies. I have so many favourites but The Ring stands out.
Favourite book: The Lord of the Rings. I didn’t like the movies but I loved the books.
Favourite colour: Black.
Favourite music: Hard rock. I actually also perform as a rock DJ in Dubai.
Profile of Udrive
Date started: March 2016
Founder: Hasib Khan
Based: Dubai
Employees: 40
Amount raised (to date): $3.25m – $750,000 seed funding in 2017 and a Seed round of $2.5m last year. Raised $1.3m from Eureeca investors in January 2021 as part of a Series A round with a $5m target.
Stree
Producer: Maddock Films, Jio Movies
Director: Amar Kaushik
Cast: Rajkummar Rao, Shraddha Kapoor, Pankaj Tripathi, Aparshakti Khurana, Abhishek Banerjee
Rating: 3.5
Closing the loophole on sugary drinks
As The National reported last year, non-fizzy sugared drinks were not covered when the original tax was introduced in 2017. Sports drinks sold in supermarkets were found to contain, on average, 20 grams of sugar per 500ml bottle.
The non-fizzy drink AriZona Iced Tea contains 65 grams of sugar – about 16 teaspoons – per 680ml can. The average can costs about Dh6, which would rise to Dh9.
Drinks such as Starbucks Bottled Mocha Frappuccino contain 31g of sugar in 270ml, while Nescafe Mocha in a can contains 15.6g of sugar in a 240ml can.
Flavoured water, long-life fruit juice concentrates, pre-packaged sweetened coffee drinks fall under the ‘sweetened drink’ category
Not taxed:
Freshly squeezed fruit juices, ground coffee beans, tea leaves and pre-prepared flavoured milkshakes do not come under the ‘sweetened drink’ band.
