The latest selloff in oil prices have left speculators in a predicament: The fundamentals continue to look poor with unimpressive drawdowns in crude oil stocks, but there is a general consensus that the extension of the OPEC deal should push the market towards a rebalancing over the next few quarters.
What that means for short-term movements in prices is unclear. The unpredictability of today's oil market is leaving some investors burned by unexpected price gyrations. For example, just ahead of the recent selloff in prices last week, oil traders bought up bets on rising prices. Hedge funds and other money managers increased their bullish bets by 7.3 percent for the week ending on June 6, but prices plunged by 5 percent a day later.
Traders looking for some direction might want to consider the futures market, where a contango structure has reemerged. A contango, in which near-term oil futures trade at a discount to futures dated further out, is a symptom of oversupply. For example, two weeks ago, futures for December 2017 traded at a $1 per barrel discount compared to contracts for delivery in December 2018. That discount ballooned to $1.49 per barrel last week, according to Bloomberg, a sign that investors are growing more pessimistic about oversupply conditions this year. "Brent spreads are getting clobbered," Amrita Sen, chief oil market analyst at consultants Energy Aspects Ltd., told Bloomberg. "The Atlantic Basin is awash in light crudes from Nigeria and Libya."