Oil remains well bid with Brent reaching out for that $70 a barrel level boosted by OPEC production cuts, stronger than expected economic growth rates and of course a weaker US dollar. There is also the structure of the market which is in ‘backwardation’; this is when the near dated contracts are priced more expensive than the far dated contracts. This alone encourages hedge funds and other speculators to play the market from the long side. Broadly, by buying the near dated contract and rolling monthly into a contract further out along the curve you are almost guaranteed a profit even if the market stays still, that is of course until the shape of the forward curve normalises.
So, currently the market is pricing the Brent March contract at $69.33 and the December contract at $65.72 with the curve inverted every month in between, this is the biggest premium from spot to a year out since 2014 and is an important factor in why the market keeps moving higher.
There are other wider implications to the strong showing by oil which was up 49% from the mid-year lows to end of 2017. Equity indices have arguably been led higher by oil and gas companies with shares in Royal Dutch Shell Plc. hitting a record high just this week. Our bond issues from issuers in the Middle East are also performing very well even with the somewhat volatile UST market this week; due to the record supply schedule from the Treasury.
Yesterday Oman took advantage of the regional strength by issuing $6.5bn in bonds, over three tranches; maturing in 5, 10, and 30 years. We did not take part in the issues as we already have our allocation in Oman and the new bonds just did not offer enough over the existing issues to encourage a switch or rotation. This morning the 10-years are up about ½ point and the 30-years about 1½ points which has encouraged our existing bonds to move higher alongside, although by a lesser amount; but enough to justify not paying the dealing costs associated with a move into the new issues.