As the month draws to a close, oil prices are poised to secure their second consecutive monthly gain, driven by expectations of extended supply cuts from OPEC+ and indications of tightening market conditions. Global benchmark Brent hovers just below $84 per barrel, registering a more than 2% increase in February following a notable uptick in the previous month. Similarly, West Texas Intermediate (WTI) stands above $78 per barrel.
One of the key indicators of market tightness is the widening of timespreads into backwardation, where near-term prices exceed those for longer-dated contracts. This bullish pattern suggests a growing consensus among traders regarding the immediate supply-demand dynamics in the oil market.
The back-to-back monthly advances in crude prices have propelled them towards the upper boundary of the trading range observed so far this year. These gains have been underpinned by coordinated supply cuts from OPEC and its allies. Additionally, geopolitical tensions in the Middle East, such as disruptions to Red Sea shipping, have contributed to the upward pressure on prices.
According to Saad Rahim, Chief Economist at Trafigura Group, the market sentiment indicates a relative tightness, driven in part by encouraging signs of recovery in global manufacturing and petrochemical sectors. The prevalence of discussions around “upside risk” underscores the growing optimism among market participants, contrasting with the prevailing cautious outlook in recent years.
Notably, WTI’s prompt spread, representing the gap between its two nearest contracts, has widened significantly into backwardation, reaching 74 cents per barrel. This shift marks a departure from the contango pricing observed at the end of December, reflecting evolving market dynamics and sentiment.
While there are uncertainties regarding the extension of voluntary output cuts by OPEC+ nations, with Russia’s Deputy Prime Minister Alexander Novak suggesting it’s premature to make definitive statements, market analysts, including Goldman Sachs Group Inc., anticipate a continuation of the reductions.
As the oil market navigates through evolving supply dynamics and geopolitical tensions, investors are closely monitoring developments within OPEC+ and global economic indicators to gauge the trajectory of oil prices in the coming months.
