Brent Crude Swings Into Contango for First Time Since November

Apr 02, 2014 12:23 pm ET

April 2 (Bloomberg) -- Brent crude futures flipped into a price structure known as contango for the first time since November, a change that often signals immediate supplies are exceeding demand.

Crude contracts for May settlement on the ICE Futures Europe exchange briefly traded at a 1-cent discount to June. It’s first time since Nov. 7 that front-month Brent was cheaper than the second month. Reduced demand in Europe because of refinery maintenance and fewer Asian purchases of North Sea crude have driven the shift, according to consultant JBC Energy.

The last extended period of contango in Brent futures ended between February and March in 2011 as the civil war in Libya began to choke off oil exports, pushing prices to more than $127 a barrel by April. The market was subsequently in backwardation, an indication of scarcity in which immediate supplies are more expensive than later deliveries.

“The Brent front backwardation is melting,” Olivier Jakob, managing director of Zug, Switzerland-based researcher Petromatrix GmbH, said by e-mail today. “The disappearance of that backwardation should translate into bearish headlines.”

Libya Talks

The resumption of exports from Libya, which are priced in relation to Brent, would further weaken the front-month Brent contract versus the second, intensifying the contango structure, according to Petromatrix.

Rebels seeking self-rule for eastern Libya are holding talks today with the government about reopening oil ports under their control since July, Ali Al-Hasy, a spokesman for the self- declared Executive Office for Barqa, or Cyrenaica region, said by telephone.

Libya, the holder of Africa’s largest oil reserves, has seen its crude output slump to about a 10th of its capacity as protests over jobs, pay and political rights disrupt operations.

Crude is also becoming more readily available in Europe as a result of maintenance at the Hound Point loading terminal in Scotland, Amrita Sen, chief oil market strategist at Energy Aspects Ltd., a consulting company in London, said in a report yesterday. This is preventing the loading of very large crude carriers that would divert supplies of benchmark crude grade Forties to ports in Asia.

Contango encourages oil companies and traders to expand crude inventories, which can be processed more profitably later when prices are higher, according to Petromatrix. The price structure can be detrimental for financial investors seeking to transfer a position from one monthly contract into the subsequent, more expensive, contract, the consultant said.