The oil market surged higher yesterday, with ICE Brent hitting US$65.76/bbl at one stage, as USD weakness, rising geopolitical risks and possibly a supply hike from OPEC+ that fell short of expectations all provided a boost. The strength continued into early morning trading today.
The move higher in flat price has been accompanied by a strengthening in the prompt ICE Brent timepsread. It’s trading at a backwardation of more than US$0.70/bbl, up from a little over the US$0.30/bbl level in early May. The spot oil market is still relatively tight. Demand is set to pick up as we move into the summer months, suggesting prices are likely to remain relatively well supported. However, the market is likely to shift into a large surplus from the fourth quarter onwards. This should put renewed downward pressure on oil prices later in the year.
Meanwhile, ongoing wildfires in Alberta, Canada, are offering further support to the market in the short run. Roughly 350k b/d of oil production is being shut down, which is around 7% of total Canadian oil production. West Canada Select’s (WCS) discount to West Texas Intermediate (WTI) has narrowed over the last couple of weeks. Continued shut-ins due to fires should provide further support to the WCS-WTI spread.