The oil market appears to be telling Saudi Arabia that its shift to pumping more oil after five years of cutting output was well timed.
The kingdom has in recent weeks pushed fellow OPEC+ members to produce more oil despite fears about an economic slowdown, a marked change in policy that helped oil prices settle at a four-year low on Monday.
But despite OPEC+ agreeing to raise output by a cumulative near one million barrels per day (bpd) between April and June, the oil market is still reflecting a perception of tight supply over the next few months of peak summer demand.
That has pushed the futures curve, which reflects forward prices, into a rare “smile” shape, a structure Morgan Stanley analysts said was last seen only briefly in February 2020.
Brent futures’ most prompt July contract was trading at a 74 cent per barrel premium to the October contract late on Wednesday, a market structure known as backwardation, which indicates immediate tight supply.
However, from November, prompt prices flip to a discount to forward prices, a structure known as contango, indicating oversupply and the likelihood that summer 2025 might be the last gasp of a tight oil market.
Having backwardation and contango together is unusual and gives the chart its “smile”.
Energy Aspects analyst Richard Price said the structure was a result of tight prompt supply coupled with expectations of U.S. President Donald Trump’s trade wars slowing economic activity later in the year.
OPEC+ cited low stocks and healthy prompt demand when it agreed on Saturday to raise output for July.
Global oil inventories stood near the bottom of their historical five-year range at 7.647 billion barrels, according to the International Energy Agency’s latest available data for February, down from 7.709 billion barrels a year earlier.
Meanwhile, refiners’ appetite for crude is rising ahead of the July-August peak driving season.
“Refinery maintenance in the Atlantic basin will start to taper off, increasing oil demand (for refining)… Summer driving should provide some support,” BNP Paribas analyst Aldo Spanjer said.
Global oil demand will rise by 1.3 million barrels per day in the third quarter of 2025 from the second quarter to average 104.51 million bpd, the IEA said in its latest report in April.
The 1 million bpd increases already announced by OPEC+ and the possibility of a further 0.4 million barrels per day in July, almost fully match the predicted rise in demand.
HIGHER SUPPLY OUTLOOK
OPEC’s decision to add more barrels to the market did change the shape of the ‘smile’, but the fact that the structure did not flip into contango reflects a balance between supply and demand, said an executive at a major trading house.
At the start of last week, eight consecutive monthly Brent contracts were backwardated through to January 2026, double the current four. The four-month Brent spread was more than twice as wide at $1.85 a barrel.
Outside of OPEC+, new projects coming online in Brazil and Guyana should boost supply towards the end of 2025, the IEA said in its monthly report in April.
Robust supply growth combined with slowing demand would result in a rapid market weakening towards the end of 2025, Morgan Stanley said.
(Reporting by Robert Harvey, additional reporting by Ahmad Ghaddar and Dmitry Zhdannikov, editing by Alex Lawler and Kirsten Donovan)