Oil Curve Shows Traders Fretting OPEC+ to Overtighten the Market

Oil Curve Shows Traders Fretting OPEC+ to Overtighten the Market

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With headline crude futures hitting $65 a barrel, the broader oil market is booming.

From futures spreads watched by hedge funds to swaps tied to North Sea oil, swaths of the market were sent spiraling by Thursday’s surprise announcement that the OPEC+ group will keep output largely in check next month.

Much of Wall Street is now highlighting concerns that OPEC and its allies may end up overtightening the market, with several gauges already climbing beyond pre-pandemic levels. Here are some of the indicators that vaulted higher since the OPEC+ meeting.

1. Spreading the Love

There’s no clearer indication that the market is baking in tightening supplies than the shape of the futures curve.

The spread between the December 2021 and December 2022 contracts for U.S. benchmark West Texas Intermediate -- closely watched by hedge funds as a gauge of market health -- has swelled $1.25 to near $5 a barrel since Thursday’s open and is heading for its strongest close since 2019. The nearby WTI contract is already $6 more expensive than that for 12 months’ time, and Goldman Sachs Group Inc. says the market’s bullish slant -- known as backwardation -- will continue to firm over the next six months.

Oil Curve Shows Traders Fretting OPEC+ to Overtighten the Market

“It is now clear that OPEC+ is in fact pursuing a tight oil market strategy,” the bank said.

2. Swaps Soar Too

It’s not just futures markets. Swaps tied to the North Sea oil grades that help set prices for more than two-thirds of the world’s crude rallied into Friday. The so-called Dated-to-Frontline swaps were up through to the end of the year, according to data from brokerage Eagle Commodities. There was also active trading of swaps tied to Russia’s Urals crude, it said.

Oil Curve Shows Traders Fretting OPEC+ to Overtighten the Market

3. Call Crazy

Options markets have also been busy, with trading volumes surging across the board on Thursday. For the global Brent benchmark, the volume of bullish call options was the biggest since March 2020. The premium traders were willing to pay for bearish put options also declined sharply in the nearest contracts -- another bullish indicator.

Oil Curve Shows Traders Fretting OPEC+ to Overtighten the Market

4. Trading Frenzy

All of that contributed to bumper volumes of futures changing hands in the world’s two leading crude markets. Thursday’s trading of Brent contracts on the Intercontinental Exchange and of CME Group Inc.’s WTI contract equated to more than 3 billion barrels -- the most since the day in April last year that U.S. crude turned negative.

Oil Curve Shows Traders Fretting OPEC+ to Overtighten the Market

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