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Oil price structure signals demand surge as virus fears fade

By Alex Lawler
FILE PHOTO: Oil pours out of a spout from Edwin Drake's original 1859 well that launched the modern petroleum industry

By Alex Lawler

LONDON (Reuters) - The oil market's pricing structure signals a potential tightening in supplies from a surge in demand as fears about the impact of the coronavirus subside and following tighter U.S. sanctions on Venezuelan exports.

Brent crude futures for nearby delivery are trading at a premium to future months, a structure called backwardation, which usually points to supplies tightening up.

The six-month Brent spread <LCOc1-LCOc7> from April to October has widened to around $1.32 barrel, up from below zero on Feb. 14.

This marks a turnaround from earlier in February when the coronavirus outbreak had pushed Brent into the opposite structure, when prompt prices fell below forward prices, known as contango, for the first time since July 2019.

The contango suggested the market was anticipating a fall in oil demand from China, the world's second biggest oil consumer, because of the coronavirus impact.

But a slowdown in new cases of the virus and China's move to cut its benchmark lending rate on Thursday have eased these worries.

"Markets are anticipatory," said a Brent futures trader. "What the backwardation is saying is that China is getting the situation under control and when Beijing restarts its economy demand will come roaring."

On the supply side, Washington's move this week to sanction a trading unit of Russian oil firm Rosneft for its ties with Venezuela's state-run PDVSA could put a tighter rein on exports from the country, an OPEC member.

This could further tighten global supplies already limited by a near halt in Libyan flows and voluntary curbs by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, which may be deepened at their next meeting in March.

"We are still trading around the coronavirus. Sentiment is a bit more balanced than it was 10 days ago," said Olivier Jakob, analyst at Petromatrix. "It puts a bit of a question mark about supplies from Venezuela," he said of the U.S. sanctions.

The move into contango had analysts looking for floating storage opportunities which would allow traders to buy relatively cheap oil now and re-sell it at a profit later, a window that now appears to have closed.

As Brent's structure now points to a potential tightening in supplies, its outright price has also risen towards $60 a barrel, up from $53 on Feb. 10.

"The current upswing is due to easing concerns about the spread of the coronavirus," said Carsten Fritsch, analyst at Commerzbank. "What is more, there appear to be concerns that the U.S. sanctions imposed on a Rosneft trading unit could deter foreign buyers."

(Editing by Jane Merriman)