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Graphic: Tighter oil market encourages destocking, contract rollover

LONDON (Reuters) - The market for Brent and U.S. crude has moved deeper into backwardation encouraging traders to draw down on supplies as producers keep a tight rein on output and hopes rise of a recovery in oil demand with the rollout of coronavirus vaccines.

FILE PHOTO: A 3D printed oil pump jack is placed on dollar banknotes in this illustration picture, April 14, 2020. REUTERS/Dado Ruvic/Illustration

Backwardation means the current value is higher than prices for later months and encourages traders to draw down oil supplies and sell promptly.

Brent crude futures hit a 13-month high near $64 a barrel on Monday.

Keeping pace, Brent backwardation was at its deepest since late January 2020 at $3.49. That structure encourages financial investors to hold large positions in oil futures because it makes it cheaper to roll over monthly contracts.

Data from the U.S. Energy Information Administration predicting stock draws and declining domestic output put U.S. oil market backwardation at a high of $3.14 on Monday.

The structure has pushed some traders from longer-dated futures contracts to more prompt ones, according to the International Energy Agency, at the same time encouraging producer hedging to avoid exposure to sudden price drops.

“The combination of moves boosted backwardation, in a self-reinforcing trend,” according to the IEA.

Global implied stock draws sped up from 1.56 million barrels per day (bpd) in the third quarter of 2020 to 2.24 million bpd in the fourth, it added in its monthly report on Thursday.

Much of the cheer from the supply side comes from top exporter Saudi Arabia unilaterally reducing supply in February and March amid cuts agreed by Organization of the Petroleum Exporting Countries members and allies, a group known as OPEC+.

Higher futures prices and reduced stocks point to a balance between supply and demand, but likely producer moves towards more production could upset the equilibrium.

“As jolly as the mood currently is, the extra Saudi cuts only last for another 50 days,” said Rystad Energy oil markets analyst Louise Dickson.

“The current bullish backwardation of the Brent curve indicates that the market has already priced in OPEC+ doing the right thing and staying disciplined with supply management. Which is a risk.”

OECD total oil industry stocks

Floating storage

Stock changes

OPEC+ base case scenario

OPEC+ alternative scernario

WTI Backwardation

Brent backwardation

Editing by David Evans, Kirsten Donovan