On the consumption side, China’s fuel use has faltered as more areas have been put into lockdown to control coronavirus outbreaks, and there have been early signs of a cyclical downturn in the United States and Europe.
On the production side, Russia’s oil exports have continued at a reduced level despite the threat of sanctions, while the United States and its allies have offered an unprecedented volume of strategic stocks to the market if needed.
Both supply and demand, therefore, look much more comfortable than they did a month ago, with a more stable outlook for global inventories and prices .
Reflecting that greater comfort level, Brent’s front-month futures contract closed at $98 per barrel on April 11, roughly the same level as prior to the invasion on Feb. 24.
More importantly, Brent’s calendar spreads have softened significantly and are now trading below pre-invasion levels.
Calendar spreads are closely associated with expectations about the future production-consumption balance and inventories.
Backwardation – when nearby prices are higher than for more distant contracts – is normally associated with under-production and low/falling inventories, while contango – the opposite – is associated with over-production and high/rising inventories.
In the futures market, Brent’s six-month spread has eased into a backwardation of just $3 per barrel, in the 85th percentile for all trading days since 1990.
But the backwardation has softened from a record of more than $22 on March 8 and is below the immediate pre-invasion level of $8.
The same softening of calendar spreads is evident in the more short-term market for physical cargoes in dated Brent.
Dated Brent’s five-week calendar spread has moved into a small contango from a record backwardation of almost $8 in early March.
The five-week spread is now in only the 42nd percentile for all trading days since 2010 down from a record as recently as March 10.
As a result, dated Brent is now trading at a discount to front-month futures, having been at a premium of more than $8 in March.
Traders still expect the global production-consumption balance to remain tight and inventories to remain low this year.
But fears about an immediate shortage of crude have diminished as the prospect of an immediate embargo on Russia’s exports has receded and petroleum has continued to flow.
The unprecedented offer by the United States and other International Energy Agency members to make 240 million barrels from strategic reserves available for sale over the next six months has also reassured traders there will be no immediate shortfall.
The offer has acted as a giant spread trade, weighing on nearby prices while supporting those further forward, flattening the calendar spreads.
At the same time, upside price risks from a possible interruption of Russia’s exports have been offset to some extent by downside price risks from China’s coronavirus outbreak and the deteriorating macroeconomic situation worldwide.
The more balanced distribution of risks has calmed some of the frenzied buying that accelerated the spike in both prices and calendar spreads in late February and early March.
The oil market has returned to its condition before the invasion – with low inventories and concerns about further tightening but no panic.
John Kemp is a Reuters market analyst. The views expressed are his own.