By Amanda Cooper
LONDON (Reuters) - Saudi Arabia's renewed pledge to do whatever it takes to cut the global overhang of unused oil has helped head off a reversal in price premiums in Brent crude futures as the end of an OPEC-led deal to cut crude production looms in March.
Saudi Energy Minister Khalid al-Falih said on Tuesday he was determined to reduce oil inventories in OECD industrialised countries to their five-year average.
"When we get closer to that (level) we will decide how we smoothly exit the current arrangement, maybe go to a different arrangement to keep supply and demand closely balanced so we don't have a return to higher inventories," he told Reuters.
His remarks lifted the December 2017 contract (LCOc1), raising the premium over January
The price boost reflected easing concern about what happens once the OPEC-led deal on cutting supplies ends. The deadline is now March although Saudi Arabia and others have indicated that it could be extended.
Investors have been worried that the Organization of the Petroleum Exporting Countries, Russia and other producers, which cut output by about 1.8 million barrels per day since January, would hike production rapidly as soon as restraints are lifted.
Until the Saudi minister's remarks, the market had been twitchy about whether OPEC had a plan for tapering any rise.
"Tapering", a phrase borrowed from the world of monetary policy, refers to a central bank's strategy of winding up a quantitative easing programme used to purchase government debt and other assets to keep borrowing costs low.
Until Tuesday, the premium of the December contract over January had shrunk to as little as 8 cents a barrel, the narrowest in six weeks, from closer to 45 cents a week ago.
Further out, the move was even more dramatic. The premium of December 2017 futures over December 2018 contracted to around $1.59, compared with $2.45 just a few days previously.
The smaller the premium, or backwardation, of the front month over future months, the weaker the belief among market participants that demand was overtaking supply.
The physical markets are also showing tentative signs of tightening supply, but Falih's words seem to have been a more powerful antidote to oil's first threat of a taper tantrum.
Brent crude spreads recover after Saudi comments - http://reut.rs/2lg8Kps
How the shape of the Brent futures curve has changed - http://reut.rs/2y3B4S8