March 12, 2010 / 2:01 PM / 10 years ago

Oil to move into backwardation this summer-Goldman

* Oil market to move into brief backwardation summer 2010

* More persistent backwardation in 2011 as oil demand rises

* OECD oil stocks to fall by 100-150 mln bbls by late summer

By David Sheppard

LONDON, March 12 (Reuters) - Falling oil inventories and a recovery in demand will boost spot crude prices this summer, moving the market into backwardation for the first time since 2008, Goldman Sachs (GS.N) said on Friday.

Backwardation is a market structure where future contracts for immediate delivery are more expensive than contracts for delivery in the future. It generally occurs when supplies are tight.

“For this time of year, OECD total petroleum inventories would need to be 100-150 million barrels below current estimated levels for front-month to rise above second-month WTI crude oil prices,” Goldman analysts David Greely and Jeffrey Currie said in a research note.

“Given our forecasted path for inventories, we don’t expect to see this happen until later this summer although we would expect front-month WTI (U.S. crude futures) to price above longer-dated contracts earlier and for longer.

A steep drop in oil demand during the financial crisis depressed the price of crude oil regardless of delivery date, but future contracts for delivery far in the future held up better as traders predicted an eventual recovery in demand.

At the peak of the crisis, the price of U.S. crude (WTI) for delivery in two months was as much as 20 percent above the front-month contract, as oil inventories started to mount.

“As inventories decline and the benefits to physical oil producers, consumers, and refiners of having oil inventories on-hand begin to outweigh their costs of storing it, they will increasingly be willing to pay to hold inventories,” Goldman said.

Refiners in the United States often need more oil in the summer months as the peak demand driving season gets into full swing.

Goldman Sachs forecasts oil prices will be between $92 and $97 a barrel in 3-6 months time.

U.S. crude oil for delivery in April was trading around $82.70 a barrel on Friday. The contract for May delivery was just 30 cents more expensive. Contracts for delivery in a year’s time traded around $85.50 a barrel.

Goldman said any move into backwardation this summer would likely be short-lived, as members of the Organization of the Petroleum Exporting Countries would likely take the opportunity to increase production.

“However, we expect the market to return to a more persistent backwardation in 2011, as OPEC spare capacity is absorbed by the market as world oil demand continues to grow with the strengthening economic recovery,” Goldman said.

The International Energy Agency (IEA) revised its forecast for oil demand growth in 2010 up slightly on Friday to 1.57 million barrels per day (bpd). World demand is expected to average 86.57 million bpd. [IEA/M]

Oil stocks in industrialised countries that are members of the Organisation for Economic Cooperation and Development (OECD) rose to 59.2 days of forward demand at the end of January from 58.3 days at the end of December, the IEA said in its latest report. (Editing by William Hardy)

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