The EIA recently published a report showing the difference in oil futures contracts and their expiration dates. Originally, the Brent crude futures would expire and roll over five to seven days before WTI futures. Now, beginning on January 29th, Brent futures will roll over two to three weeks before the expiration of WTI futures. This change has multiple implications when comparing the two benchmarks.
Over the past decade, the United States has seen a dramatic increase in the buying and selling of futures contracts. Even more recently, the industry has witnessed growing numbers of non-commercial investors, those interested in trading contracts for investment and earnings purposes. While originally dominated by the commercial sector to control price, physical oil production, and crude trade, this change in expiration dates may have subtle impacts on oil prices and how both groups trade and buy contracts.
Originally, the most immediate delivery contracts for both benchmarks occurred during the same delivery month. Brent contracts are based off of North Sea Brent, Forties, Oseberg, Ekofisk (BFOE) supplies while WTI is based from Cushing, Oklahoma. Given the ocean shipments versus land-pipeline shipments for each contact respectively, the historic alignment of prompt contracts represented the differences of importing crude to the Gulf Coast against shipping it by pipeline from Cushing. The change now accounts for the time taken to purchase, sell, and load Brent crude coming across the ocean.
With the recent contango, indicating front-month futures contracts trading less than or at a discount to longer-term contracts, it’s clear the ample supply is here to stay. The opposite, when there is a difference between the price of short-term and long-term deliveries of oil futures, is known as a backwardation. The new delay in expiration dates and accurate comparing of futures contracts can now avoid artificial contango and backwardation. The new delay in contracts is also indirectly related to this oversupply as more calls from Venezuela, Russia, and other OPEC nations come in for an emergency meeting. A more effective comparison of these contracts will help lead to more accurate manipulation of commodity prices.
The current front month of the February Brent contract has lower open interest than the March contract. Typically, positions close in front month contracts and open in the next month during the last week of trading. The opposite is true with current Brent contracts, with open interest in February at 163,000 contracts and open interest in the March contract at 450,000 contracts, as of January 7. WTI contracts are normal for now, with open interest higher in the first month than the second month.