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There’s an Early Sign OPEC’s Push to ‘Fast-Forward’ the Normalization of the Oil Market May Be Working

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When it comes to OPEC production cuts, “We tend to cheat,” said former Saudi Arabia Oil Minister Ali al-Naimi after the group reached an agreement to curb output late last year.

But the extent of that cheating won’t be too bad this time around, reckons Goldman Sachs Group Inc.’s Damien Courvalin. The analyst sees OPEC and non-OPEC nations enacting a full 84 percent of their agreed-upon cuts, citing the incentive among lower-cost producers to “fast-forward the normalization in inventories.”

Such a move would effectively alter the shape of the oil futures curve, ensuring that competing shale producers will be less likely to lock in 2018 production as longer-dated contracts cheapen relative to near-dated ones, helping to reduce the global glut in crude. The dramatic change in the shape of the Brent futures curve over the past five weeks may be an early sign that the tactic is poised to bear fruit.

While the curve was in a state of contango before the November 2016 agreement — meaning near-dated oil delivery contracts were less pricey than longer-dated contracts — part of the curve has now shifted into the opposing state of backwardation, meaning a contract expiring in December 2018 is now trading at lower price than contracts expiring in September 2017, for instance.

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Written by Luke Kawa

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