LONDON: Brent futures for delivery in the first months of next year have given up much of their premium since the announcement on Monday that the Forties pipeline system would be shut for emergency repairs.
The Forties pipeline system, which carries around 450,000 barrels per day and handles nearly a quarter of North Sea output, is likely to be shut for several weeks, according to owner Ineos.
But traders have become much more sanguine about the impact on benchmark North Sea oil prices as well as the wider oil market.
Futures prices for Brent crude delivered in February have declined more than $3 per barrel since peaking on Tuesday and are now almost back to their level before the shutdown was disclosed.
The calendar spread between Brent futures for delivery in February and March has also softened from 94 cents per barrel backwardation on Tuesday to just 57 cents on Thursday.
Brent's premium to WTI has shrunk from $7.26 per barrel to $5.78, also roughly in line with where it was before the pipeline was stopped.
The initial surge in Brent futures prices was likely an overreaction to the supply interruption given its time limited nature and the availability of alternatives.
But it has already forced refiners to make adjustments to reduce their demand for Forties and other crudes in the Brent-Forties-Oseberg-Ekofisk-Troll complex.
Scotland's Grangemouth refinery has initiated a partial shutdown since it is not economic to buy alternative crudes to replace lost deliveries of Forties.
In practice, the interruption of the Forties pipeline system, even if it lasts for two to three weeks, is unlikely to have a major impact on the global supply-demand balance in 2018.
The impact is swamped by much larger and longer-lasting changes elsewhere in the supply-demand-inventories outlook.
On Tuesday, the US Energy Information Administration upped its forecast for US crude oil production next year by 70,000 barrels per day (bpd) to 10.02 million bpd.
The upgrade, which covers average production levels over an entire 12 months, easily offsets any loss of production from the Forties system for a few weeks.
Rising prices for Brent and WTI are already encouraging more drilling by US shale producers and increasing projected production next year.
As a result, the International Energy Agency now forecasts the global oil market will be roughly balanced next year, with a small surplus in the first half followed by a small deficit in the second.
There is a large amount of uncertainty around the forecast, especially on the demand side, but the forecast increase in shale output is acting as an anchor on Brent prices.
There are also a large number of hedge fund long positions overhanging the Brent market and very few short ones to spur a short-covering rally.
The bigger picture is of a cyclically tightening oil market but with considerable uncertainty about how far and how quickly US shale producers will dampen any further price increases by boosting their production.
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