Early Signs of Oil Glut Reduction Challenged by Decade-Long Russian Oil Output Growth

The rapidly deteriorating Venezuelan economy is also a threat to the development of sustained backwardation. File Image / Pixabay

Bloomberg on Wednesday reported that "at least a portion" of oil futures has begun to show backwardation, a pattern that typifies a shortage and a sign that traders expect the global glut to ease and are attempting to lock in their supply by paying more for delivery.

The news agency admits that while the trend is not quite in the full backwardation last experienced prior to 2014, "it's a start" and hopefully longer lasting than the signs of backwardation shifting that occurred in May of this year but quickly reverted to contango.

The pure data driving these signs are arguably more substantial than the rhetoric and rumours that have driven crude prices upward over the past few weeks; however, in light of world events in the energy sector, it's difficult to foresee anything happening apart from every opportunity being taken to increase production.

Case in point: Russia, whose second largest producer, Lukoil, expects its output to rise over the next 8-10 years by bringing new fields online, according to the company's vice-president and co-owner, Leonid Fedun.

Fedun told the Reuters Russia Investment Summit on Wednesday that "The three-year and ten-year company development plan is under deliberation; according to the parameters under consideration, Lukoil's hydrocarbon production will be on the rise for the next 8-10 years."

One highly promising project is located in Iraq and known as Block 10, which Fedun said potentially contains "hundreds of million of tonnes" of oil.

Another familiar development that doesn't portend well for the health of the crude market (at least in the near term) is Venezuela, whose economy has deteriorated to the point where allies China and Russia are reportedly accepting oil as payment in kind for loans previously provided to the Bolivian republic.

A paper written by Richard Cooper, a partner at law firm Cleary Gottlieb, and Mark Walker, managing director at Millstein & Co, urges Venezuela to  put its state oil company PDVSA into Chapter 15 US bankruptcy protection - and then default on an estimated $63 billion of bond obligations to the U.S.

The paper states, "When the inevitable default occurs, and it will no doubt come sooner than the current regime prefers, policy makers in Venezuela will have to grapple with what may be the most complex and challenging sovereign restructuring ever, and they will need to act quickly, possibly as newcomers to government in the midst of a disorderly default."

Another sign Venezuela has reached the point of desperation occurred last week, when the price of its oil and fuel was published in Chinese currency - president Nicolas Maduro's way of shunning the U.S. dollar following Washington's charge that his leadership is undermining democracy.