Friday, June 22, 2012

Oil: Brent Flips to Contango and Sets Up a Trade

Reuters noted the contango in swaps a few days ago, the FT commented last night:
...The rise in global inventories has reshaped the Brent price curve with the front month trading at a discount to contracts further down the curve.

The shape, known as “contango”, which has been in place for the past week, could “prove shortlived” if Saudi Arabia were to cut production markedly, said consultant JBC....
A couple hours later the WSJ said:
...Contango in WTI and Brent prices is steadily widening, reflecting market oversupply that could weaken prices further...
I point all this out because I can't recall as much concentrated focus on the term structure and I'm wondering how long it will take the market to despair and then offer down the longer dated contracts, re-establishing the backwardation.

Buy front and sell 2013 appears crazy at this instant but may become a nice trade quicker than one might expect.

Here's more at MarketBeat:
Oil has lost nearly one third of its value over the past three months. This week, the Brent market made a surprising turn, which may indicate that the market may be near a turning point.

On Tuesday, Brent crude, for near-term delivery, dropped below those for delivery in several months, flipping into a market condition known as “contango.” As of Friday morning, Brent for August delivery is trading at $90.45 a barrel, compared to $90.90 for the October contract.

Brent is the European benchmark; WTI is the U.S. benchmark. WTI today is up 1.3% at $79.21.

This marks a reversal from an extended period of “backwardation” in the Brent market, according to James Williams, owner of WTRG Economics, an independent energy research company. Since February 2011, except for a few brief occasions, Brent has been staying backwardated, where buyers are willing to pay a premium to have the oil immediately, he said.

“The fact that it is trading in contango through most of 2013 underscores how weak the fundamentals are,” said Hussein Allidina, head of commodity research at Morgan Stanley. In a contangoed market, producers are offering discounts for oil ready for shipment, suggesting subdued demand and ample supply. For now, fears for supply disruptions that have been plaguing the Brent market seem finally to be abating....MORE
Finally, Platt's from Wednesday morning
 ANALYSIS: Brent price structure reflects demand uncertainty 
The Brent complex flipped to contango last week, showing an oversupply situation in Europe, but exports to South Korea and planned field maintenance have kept it stronger than it would otherwise be, said traders Wednesday.

August ICE Brent was trading at a $0.24/barrel discount to September by 1040 GMT, a situation known as contango.

Later Brent intermonth spreads were trading in contango up until February-March 2013, the first time such a sustained weakness is seen since February 2011, when civil war in Libya interrupted the country's oil exports.

Contango is when supply of prompt oil is deemed larger than the supply of oil for later periods. The opposite is known as backwardation....MORE