Brent crude for prompt delivery traded this week below contracts for delivery as far as six months into the future, the latest sign that increasing shipments through the Strait of Hormuz have caused a near-term glut. The first-month September Brent futures contract traded below each of the next five contract months on Friday, after it traded at a discount to the second month last week.
The six-month Brent spread flipped to a discount for the first time this year on Wednesday, dropping to minus 56 cents a barrel on Thursday before recovering to a small premium on Friday. Prompt oil trading at a discount to oil delivered later is a sign that investors see current demand as weak and ample supplies persisting longer as shipping flows through the strait recover. This price structure is known as contango.
“The newly released crude is chasing demand that has already been reduced and met, and that is precisely why the front of the curve is taking the hit,” ICIS global oil markets lead David Jorbenaze said.
TO STORE OR NOT TO STORE
A contango market typically provides an incentive for traders to store barrels and sell them later for higher prices at a profit. Storage could provide some respite to sellers competing to place their barrels in a weak physical oil market, while also helping to replenish inventories after heavy drawdowns during the supply crisis linked to the Iran war.
“Contango does encourage storage, and it doesn’t take much to incentivise it because inventories have already been depleted during the war period,” said Nitesh Shah, commodity strategist at WisdomTree.
Storage plays are profitable when contango is deep enough to cover the associated storage and financing fees, which could be around 80 cents to $1 per barrel for firms without their own tanks, according to one European crude oil trader.
Whether contango deepens or is only a temporary phenomenon depends on whether demand in Asia starts to pick up again, SEB analyst Bjarne Schieldrop said, adding that storage plays will be limited given the current mild contango.
(Reporting by Anushree Mukherjee in Bengaluru, editng by Alex Lawler and Rod Nickel)