The contango in Brent is likely to widen on the back of the growing surplus and the requirement to accommodate more expensive storage channels, the latest Barclays report says.(Contango is a situation in futures market when far month contracts are priced higher than near month contracts)

Barclays says the upcoming refinery maintenance is expected to reduce refinery appetite for crude, which could further weigh on the physical markets.

“We are yet to see any material indications in fundamentals to support a rebound in crude prices,” the report said.

According to Barclays, oil market fundamentals are gradually shifting in response to the sharp fall in prices, but are set to have an impact on market balances only by the latter half of 2015.

The impact is not yet swift enough to erode an even more acute surplus in Q1 15 relative to the surplus in Q4 14. With Q2 15 set to start with high product stocks, refinery maintenance scheduled, and the seasonal low period, this surplus is expected to expand by another 1 mb/d q/q, Barclays said.

Emerging Markets

For the top four importers of crude oil (Europe, Japan, China and India), their trade weighted currency depreciation has so far offset 16% of the fall in oil prices. The bulk of this offset comes from Japan and Europe given their currency weakness, with the depreciation taking 23% off the benefits of the price fall in oil during this period, while China and India’s currency depreciation has only taken 3.5% from the move in crude.

Crude price fall has transmitted through emerging markets, but the benefits are being felt at the national government level rather than the individual retail level, given product prices haven’t fallen equally. In China and India, not only have subsidies been removed, but taxes and duties have been applied.

This helps the countries’ national budgets and may help increase government expenditure on infrastructure projects that could in turn help oil demand through income distribution effects. This is likely to contribute to helping oil demand growth increase in H2 15, along with price elasticity, according to Barclays.
Source: Barclays