Hurricane Harvey

:: While the headlines have been dominated by the devastation wrought by Hurricane Harvey, oil traders have quietly become more bullish, or at least less bearish, about 2018.

Brent calendar spreads have resumed their steady march from contango toward backwardation as Texas refineries resume operations after shutting down during the storm.

Brent spreads from November to December and December to January are now trading in small backwardations while inter-month spreads for the rest of 2018 are close to flat

The calendar spread for the whole of the first six months has moved into backwardation for the first time since oil prices started to slide in July 2014.

Spreads are closely related to traders’ perceptions about the future supply-demand balance and changes in inventories.

Contango is associated with high or rising inventories while backwardation is linked to low or falling stocks.

Like spot prices, spreads can be distorted by short-term noise as traders accumulate and liquidate positions in a herd.

But spreads are arguably less noisy than spot prices, and provide analysts and traders with an improved signal to noise ratio.

For the first time since oil prices slumped in 2014, the emergence of a small sustained backwardation indicates traders anticipate a balanced market or even a sustained drawdown in global oil inventories.

The tightening of the Brent spreads is not a recent phenomenon. Brent has been marching gradually, albeit unsteadily, from contango to backwardation since early 2015 and especially 2016.

Lower oil prices have spurred slower growth in oil output and faster increases in consumption, helping eliminate the previous oversupply and raising the specter of under-supply in future.

Coordinated production cuts by OPEC and Russia announced at the end of 2016 accelerated a rebalancing process already underway.

And Saudi Arabia’s pledge to limit oil exports even further this summer contributed to a further tightening of the supply-demand balance since July.

Brent spreads are not the only sign of renewed bullishness among oil traders.

Futures prices for US crude to be delivered in 2018 have been rising in recent sessions and are now at the highest level since May.

The WTI calendar strip for 2018, which is the benchmark for US shale firms’ hedging programs for next year, has climbed to around $50.70 per barrel from a recent low of $45 in June.

If most oil traders are not exactly bullish yet, they are no longer bearish.