Crude oil prices sustain rally on strong backwardation

After the OPEC’s additional production cuts, Crude oil prices are trading positive. Optimism surrounding trade talks are also keeping the crude oil price supported.

Sakina Mandsaurwala

Precious metals bid farewell to 2019 with strong gains closing above $1500/oz while Comex Silver prices closed higher by 4 percent as traders and fund managers position themselves for the year 2020. On the contrary, the performance from the base metal sector remains mixed, with aluminium and copper ending the week with gains while other base metals ended negative.

The continuous drawdown in copper inventories and news of production cuts from large Chinese producers are providing support to the copper prices.

In energy complex, Nymex Crude traded higher and natural gas closed with losses. Crude oil traded firm on account of OPEC+ nation’s additional oil cuts and shrinking inventory in US, while Nymex natural gas closed down with 5.5 percent last week on a warmer weather forecast during the most of December.

After the OPEC’s additional production cuts, Crude oil prices are trading positive. Optimism surrounding trade talks are also keeping the crude oil price supported.

The spread between WTI and Brent has also increased to $6.24/bbl on record high production from the US, while OPEC nations are reducing their production.

Currently, the December 2020 futures contract is trading with backwardation of $4.66/bbl, as compared to the near month. It means that prices for the current month are trading at a premium, and it indicates that the market is expected to remain tighter in near future. OPEC and its allies are currently limiting its oil production by 2.1 mbpd until March 2020.

The current month’s price backwardation against future prices, and the rising spread between Brent and WTI indicates that the crude oil market is expected to remain tight in the coming months.

If the US-China trade deal agreement is signed, and OPEC nations continues its production cuts as planned; the oil market will remain balanced and optimism surrounding these events will keep price supportive at $58/bbl and move higher towards $64-$66 per barrel.

Currently Nymex Crude prices are trading at USD 61.6 per barrel.

The author is Commodity Analyst at Narnolia Financial Advisors Ltd.

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