The physical crude oil markets signal a rapid shift from a huge oversupply at the peak of the coronavirus locks in April to an expected under-supply in the second half of the year.

Brent’s six-week calendar spread shrank to less than 70 cents a barrel from more than $ 6 a barrel in the first week of April.

Calendar spreads correlate closely with the expected production-consumption balance and are usually a more accurate indicator than spot prices alone.

The dated Brent crude oil price is based on the cost of buying and selling physical cargo from the Brent, Forties, Oseberg, Ekofisk and Troll field systems in the North Sea.

In contrast to future LCoc1 contracts, trading is very short-term and is dominated by producers, refineries, physical traders and large financial institutions with few hedge funds and no private investors.

Since dated Brent is a complex of crude oils at sea, the storage restrictions that have recently distorted inland WTI prices are avoided.

The shrinking calendar spread is therefore a strong signal that the physical market has become much more balanced in the past six weeks.

The organization of the oil-exporting countries and their allies have cut crude oil exports sharply, while refinery consumption has started to increase as the barriers wane.

The fears that crude oil is no longer available in tank farms on land and in ships off the coast have disappeared.

Dated Brent’s six-week calendar spread is now in the 20th percentile for all trading days in the past decade compared to the 1st percentile at the beginning of last month.

In the long term, the crude oil market remains weak, but not exceptionally. The current spreads are in line with high, but stable or falling inventories, a sharp turnaround compared to the stocks that rose a month ago.

Like the balance between production and consumption, spreads tend to be cyclical and are likely to narrow further, provided the economy continues to recover and oil producers remain disciplined.