Double-whammy for oil and full contango moving closer
Over the last two weeks, the oil market has seen a double whammy.
First, fundamentals are weakening, OPEC+ is producing too much oil, and “oil on water” has already spiked. Earlier this week, the IEA warned that the market could see a surplus of 4 million barrels per day next year.
Secondly, the geopolitical premium has fallen after Trump’s two-hour phone call with Putin last week. The two presidents now appear to be “best friends” again. The pressure Trump had said he would put on Putin now seems illusory.
It is no longer likely that Ukraine will receive the long-desired Tomahawk missiles that could have struck where it hurts Putin and Russia the most – namely, oil facilities. There will therefore be no new wave of effective Ukrainian attacks or fresh US sanctions. This was confirmed on Friday at the Zelensky-Trump meeting at the White House. Trump is planning a one-to-one meeting with Putin, and new US sanctions in Congress are officially on hold.
The market had begun to price in the possibility that Russia’s oil exports could face greater obstacles, partly due to mounting pressure on India. However, the situation now bears resemblance to the Alaska meeting in August. As we all recall, it merely led to a continuation of the war and an escalation of Russian attacks. Back then, Trump also talked about a “deal” with Putin.
Bunker Port Brief
ARA
Antwerp strikes continuing to impact existing and future deliveries. Hsfo we anticipate getting tighter as Shell and Vitol are both reported to be giving back storage in Rotterdam.
Fujairah
Port of Fujairah bunker sales in Sept dropped to a 3 month low with HSFO increasing market share to 36%.
HSFO tightness has eased but at least 7 working days notice required for inquiries to ensure market coverage and avoid prompt premiums.
VLSFO premiums have reduced from last week with some suppliers reloading barge avails.
Houston
Demand is extremely weak accross all grades, but especially so for 0.5 VLSFO. Accordingly, VLSFO premiums have continued to fall. Spot VLSFO premiums have turned flat to negative to their respective indices . HSFO-VLSFO spread is below $50/mton. "Normal Premium is 90-100/mton. Weather. Some systems of cooler air have moved into the Houston area. Cool fronts bring increased winds offshore and at Bolivar Roads. No major delays thus far but something to consider was we move to the end of the year and cooler months.
New York
Demand on contract is steady for HS and .5. Still seeing some seasonal demand on spot south of Philly.
Panama
Demand low today.
Port Louis
Tight avails in PL as some suppliers await new cargoes. Higher premiums seen due to this.
Durban
Another quiet week in Durban sees the suppliers dropping prices for any volume seen. Port Elizabeth has seen regular volume for bunkers only, however the weather the last week has been difficult to effect supplies.
Walvis Bay
Weather appears to be easing in the region, with some supplies now beginning offshore.
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Brent is below fair value when in trades at USD 60
However, the oil price seems to be trading below fair value. We have a daily updated model based on other financial variables correlating with the oil price. The model indicates that the fair value for Brent oil is closer to USD 64 than USD 60. Hence, it seems that the market has undershot on the downside. We often see that happening when a barrage of bearish news hits the market.
We also continue to see several supportive factors for oil prices. OPEC’s compensation cuts from overproducing members will limit the effective supply increase in the coming quarters. Additional spare capacity is concentrated mainly in Saudi Arabia and the UAE, with some contribution from Iraq.
Meanwhile, China continues to build its strategic oil reserves, adding approximately 150 million barrels over the past six months – a trend that will likely continue. In the United States, production growth remains constrained at the current price level, reinforcing the view that future supply growth will be limited.
Another essential thing to know is that the Brent curve has moved towards full contango (forwards above spot). There is now contango between February 26 and March 26 Brent contracts.
The contango reflects the market prices in a “glut of oil” hitting the market over the next six months. Contango is the market's reaction to an oversupplied physical market. The spot price is pushed lower until someone buys the oil for storage. However, the oil will not be stored until the curve moves sufficiently into contango to cover storage and financing costs when the price risk is hedged. Unlike during the pandemic, tanker rates are now higher – and, importantly, funding costs are much higher as USD rates were close to zero back then.
Hence, we are moving towards a situation where spot prices may still face downward pressure. However, there are significant mitigating factors, as discussed above. The oil curve could move further into contango. Consumers hedging 2026 exposure should not expect Cal-26 and Cal-27 prices to follow the spot if the spot drops further. In fact, the risk may increasingly be to the upside for forward prices.
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