Ever since

OPEC+

started

ramping up supplies

in April, the group has drawn reassurance from one key oil indicator:

the price curve

. As it prepares to meet this weekend, that gauge is faltering.

OPEC officials pay close attention to the premium that

Brent
crude futures

for more immediate

supply command

over later contracts. The positive spread — known as backwardation — has held up for months, even as Saudi Arabia and its allies fast-tracked the return of 2.2 million barrels a day. It means traders saw the

oil market

as tight.

But as the Organization of the Petroleum Exporting Countries and its partners ponder their next steps, the metric is deteriorating. The difference between the second and third months shrank to the weakest level since November on Thursday, at US18 cents a barrel. Similar gauges for the Middle Eastern market, representing barrels key OPEC producers pump, have also come under pressure.

Inventories remain tight in the United States, but oil supplies are starting to accumulate at sea, including a flotilla of unsold cargoes from the Middle East. Morgan Stanley expects the forward curve will flip into the reverse structure where prompt barrels trade at a discount — known as contango — as stockpiles eventually pile up in the West. That’s normally a bearish signal.

“We are all waiting for these ballooning global stocks to finally show up in Atlantic Basin crude,” said Martijn Rats, the bank’s global oil strategist said at the Argus Global Markets conference this week. “At some point they’re going to build and then we’re going to go to contango.”

The group is still striving for consensus on what to do next. The options under preliminary discussion include another marginal increase of 137,000 barrels a day like this month’s, or multiples of that, according to delegates.

Earlier this week, one delegate said the group would discuss whether to fast-track its latest round of supply hikes in three monthly instalments of about 500,000 barrels a day. OPEC said it didn’t have plans in place to increase output by that amount.

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The decline of oil’s forward curve suggests they have good reason to be cautious.

Bloomberg.com