Is the oil glut fading?

Bloomberg/Fuel Fix:

For all the feverish speculation of OPEC action that’s roiling oil markets, the real reason for crude’s recent recovery probably lies elsewhere.

Oil futures have rallied more than 10 percent since the Organization of Petroleum Exporting Countries said it would hold informal talks in Algeria in late September, fueling expectations it could revive a pact on freezing production. Banks from Citigroup to Bank of America Merrill Lynch see a simpler explanation for the rebound: The global oil oversupply is finally dissipating.

A narrowing discount — also known as contango — on immediate supplies of Brent crude is the “clearest indicator” that the two-year glut is fading, Credit Suisse Group said. The spread between the first monthly Brent futures contract and the sixth has contracted more than 40 percent in the past month, data from the ICE Futures Europe exchange show.

“OPEC remains very dysfunctional,” Francisco Blanch, head of commodities research at Merrill Lynch in New York, said in a Bloomberg Television interview. “The reality of the matter is in the last six months we’ve moved from a massive surplus to a balanced market, and now we’re moving into deficit. The market is tightening — you see it in Brent spreads.”

Coming just days after oil fell to a three-month low near $40 a barrel, OPEC’s Aug. 8 announcement that it would hold “informal talks” in Algiers fostered a rebound in prices, even though most analysts doubt the group will agree on any production limits. While markets have been fixated on OPEC speculation, robust demand is whittling away brimming oil inventories, according to Blanch.

OPEC is unlikely to agree on a freeze next month as the same political rivalry between Gulf members Saudi Arabia and Iran that thwarted a similar initiative in April remains an obstacle, analysts from Citigroup to Commerzbank say.

Signals from producers that the group may act are simply “jawboning” to push prices higher, Ed Morse, head of commodities research at Citigroup in New York, said in a Bloomberg Television interview.

“I suspect that there’s not going to be much happening” in Algiers, Morse said. More importantly, declines in the “huge oversupply” of crude and products mean “the market is really moving into balance.”
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There is more.

Any OPEC agreement is a remote happening.  The cartel has lost control of the market and they know it.  Iran has still not gotten back to its pre-embargo totals so it is not contributing to the perceived over-supply.  Venezuela is struggling to pay for light oil it needs to dilute its heavy crude.

One of the reasons why OPEC's market share strategy did not work is  that US producers were able to more than remain price competitive by focusing on the Permian Basin.  While all but two OPEC countries were losing money selling at $50 a barrel the Americans were making money at that price in the Permian.