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Oil prices to slip to ‘backwardation’

KUWAIT: Oil prices are expected to slip from a state of ‘contango,’ a situation where future price is higher than the spot price, into a phase of ‘backwardation,’ where the future price is below the spot price, an oil analyst said yesterday. ‘Contango’ is an indicator of a weak market, whereas ‘backwardation’ signifies a more robust one with higher demand, Mohammad Al-Shatti said.

When the future price of oil is below the spot price, “it is an indicator of equilibrium in the market,” Shatti noted, predicting that the transition could take place during the period from October to December 2016. Moreover, Al-Shatti revealed that prices of Brent Crude Oil have dropped during the first quarter of the year, to $34 per barrel (pb) from $44 pb during the fourth quarter of 2015, a decrease equivalent to $10 pb.

Shatti also predicted that there appears to be no resurgence of oil prices in sight, saying that oil production will continue to dwindle during 2016. The analyst pointed to a significant reduction in oil production in the United States, which could further push the oil market away from a state of balance and stability.

Shatti also noted that the US Energy Information Administration is predicting a drop in US oil production from 9.18 million barrels per day in January 2016 to 8.22 million barrels per day in December of this year.

Meanwhile, Shatti also predicted further drops in oil production in non-OPEC nations, saying that such a slump in production will continue well into the year 2017. The ongoing year could be the most dismal in terms of net profits, with next year being slightly more lucrative, he added. —KUNA

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