Backwardation Tightens Supply
June 22nd, 2020
Baker Hughes reports oil rig counts are down 10, putting total oil rigs at 189. That’s 600 fewer than last year for this reporting week.
The news on the energy front was quiet over the weekend and remains so as we start the new week.
One of the themes I’m seeing is the backwardation in Brent crude oil. This is an indication of a tightening supply situation. The refinery crack spreads are not too good and that has refineries running at lower rates. This is also helping bring supply and demand more into balance.
The backwardated Brent futures are also moving crude come out of floating storage. Rystad Energy’s senior oil market analyst, Paola Rodriguez Masiu, says “the floating storage, in particular in the Gulf Coast is already decreasing as buyers are opting for taking out of the floating tankers rather than engaging into a new booking.”
On Friday, European Union leaders restarted negotiations to implement a 750 billion Euro recovery fund to support economic recovery in the Eurozone. This would improve the prospects for stronger crude oil demand later this summer.
There was also supportive news for markets as US and China trade tensions might be easing with China buying more soybeans, corn and ethanol that are in line with the Phase 1 trade deal agreed upon at the beginning of this year.