Oversupply in oil market to continue

OPEC, a group of 12 oil producer countries, is meeting on Friday to stabilise (read increase) oil prices. But the outcome of the meeting appears to be a foregone conclusion. The strategy of oil producers to defend their market share is expected to take precedence over the possibility of a price increase and therefore the oil market will remain oversupplied.

The futures market seems to broadly concur with this outcome. This is evident from the fact that short position contracts on the NYMEX for non-commercial participants — a key gauge for speculators perception –– has jumped to 246,026, which is more than two-fold of the 10-year average, according to Bloomberg.

The average crude oil price was below $50 per barrel in November, for the fourth month in a row, as a record supply glut showed no signs of ending. Price is nearly 35% down since January 2015. The near month oil future contract at WTI is trading at a discount to the far month futures. This phenomenon is known as contango, which typically signals that market is oversupplied. January contract of WTI is at $1.44 a barrel less than February futures and the gap between these two contracts has reached its most since December 2010. Given the gap between near and far months is at record level, some analyst are calling this as ‘Super Contango’.