The oil expert Muhamed Ahmed wrote:
Why does oil market move against all odds?
Who focuses only on the spot price, he expects it to keep on decreasing; at $32 a barrel, Russians declared a barrel would hit $30. Meanwhile, the price rose to $35 a barrel.
On the other hand, the Saudis claimed they would reach a production level of 12 million barrels per day. As a result, the price jumped to 38 dollars a barrel.
It’s either these states lie, or speculators are in a state disbelief
After the Saudi announcement, the expected price reaches $25 per barrel
Well, first see the forward rate curve
Look at the yellow line, which represents today’s price movement; speculators are bounding rates at the end of the curve, still above $50, yet moving up compared to yesterday’s gray line.
This is where mystery could be solved
Look at the Contango, represented by the triangles
The difference between May 2020 (the closest month) and March 2021 (The furthest month) is growing, showing pressure for higher prices.
If the difference remains the same, speculators will sell their oil at that price, buy from the spot market and pay a storage cost that does not exceed $2 a barrel for a whole year.
The difference now is $5.47 a barrel, which means that they will achieve $3.47 per barrel.
The market is moving toward adjustment, and there is a lot of money being won by speculators, and a lot of money being lost by producers.
Until this moment, the structure of the market does not recognize the decline of the future price of $50 per barrel, and that is why the price moves up to an equilibrium position regardless of all Saudi and Russian decisions.
This is the best solution for the market and for the continuation of oil shale producers. In case there is a change in the structure, and if oil shale producers exit, there would be a supply crisis in a period not exceeding two years, and prices might rise to more than $100 per barrel, but -for sure- they will not last, as this will bring back high cost producers. That is balance.
