Backwardation is widening

The Brent contract change has caused the 1st-nearby to lose nearly $2/b due to the extremely sharp backwardation. It is trading below $89.5/b this morning. Backwardation continues to widen: when comparing the 1-year contract and the 1st Brent contract, it now exceeds $10/b, which has not been seen since 2013. The situation remains extremely tense in the short term due to geopolitical risks, particularly with regard to Russia.

Some envisage a commitment by OPEC to produce more to ease these tensions (beyond the 400b/d hike), but this would not solve the core problem which is the lack of spare production capacity in several OPEC members as well as Russia. OPEC is certainly also concerned about the potential consequences of a very tight monetary policy on demand in the second half of the year and the Biden administration’s desire to reach a quick agreement on the Iranian nuclear issue in order to bring down gasoline prices in particular. 

In the very short term, the cold snap in Texas should be monitored as it could hamper oil production, thereby adding to price pressures.

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