Is the Oil Market Moving toward a Supply Deficit?

On February 16, 2018, US crude oil April 2018 futures closed $5.34 above the April 2019 futures contract. On February 9, 2018, the futures spread or the price difference was at a premium of $4.55. On the same day, US crude oil April 2018 futures closed $4.55 above the April 2019 futures.

Between these two dates, US crude oil April futures rose 4.3%. Oil ETFs and ETNs like the ProShares Ultra Bloomberg Crude Oil (UCO) and the Credit Suisse X-Links WTI Crude Oil Index ETN (OIIL) rose 8.8% and 3.4%. Their price performance could be impacted by this futures spread. On February 16, 2018, US crude oil futures until March 2019 were priced progressively lower, which could benefit these ETFs.

A rising premium could point to market expectations for oil demand overtaking oil’s supply. A possible supply deficit in the oil market could boost oil prices. In the week ending February 16, 2018, US crude oil prices rose 4.3%. The market expectations drive the futures spread. However, a fall in the premium could make oil bulls suffer.

In contrast to the premium, during a higher discount, US crude oil prices could fall. Such a price structure could point to excess supply in the market. For example, the discount rose to $2.60 on June 21, 2017—the lowest closing level for US crude oil prices since August 11, 2016. If the discount falls, oil prices could rise.

The futures spread at a discount or at a premium could influence US oil producers’ risk management techniques. Energy ETFs like the Energy Select Sector SPDR ETF (XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) contain US oil producer stocks. Last week, these two ETFs rose 4.7% and 2.2%—compared to a 4.3% rise in US crude oil April futures. Similarly, midstream stocks’ oil transportation and storage-related decisions are also impacted by oil’s futures spread.