Fear of COVID-inspired crude oil glut? Fading ‘contango’ tells a different story


Fears of a further glut in crude oil supplies would be understandable as cases of COVID-19 increase, forcing a further slowdown in economic activity around the world.

But oil futures tell a different story, with Brent BRN00, -0.56%, with the global benchmark ending Monday at its highest since March 5, while the US benchmark, West Texas Intermediate CL.1, + 0.99%, advanced to a close three-month high.

Price action has been even more bullish below the surface, analysts said, pointing to a significant shift in the relationship between short-term and long-term price. The premium for forward contracts in several months on nearby futures – a condition known in trade jargon as contango – fell sharply in the two weeks since Pfizer Inc. PFE’s announcement , -0.49% and BioNTech SE BNTX, + 2.33% a very high efficacy rate for their vaccine candidate.

“The rapidly waning bearish contango structure, or the spread between contract months, is on average only 7 cents per barrel for the next 12 months,” said Michael Tran, analyst at RBC Capital Markets , in a note on Monday, referring to futures contracts on Brent, the global benchmark index traded on ICE Futures Europe.

RBC Capital Markets

“Put simply, a contango as narrow as such considers that the storage of a barrel is not profitable, which implies that world oil balances are tighter than the market previously thought,” he said. written.

Under normal market conditions, the difference between consecutive months partly reflects the cost of storing crude. Typically, monthly onshore storage costs range from around 25 to 30 cents per barrel, Tran noted. The current floating storage economy involves rates in the order of 35 cents a barrel, he said.

In addition, spreads on what is known as the futures curve for Brent and West Texas Intermediate crude, the US benchmark traded on the New York Mercantile Exchange, have narrowed rapidly.

The spread between the near month and the six-month contract for Brent narrowed by $ 1.33, while the same spread for WTI narrowed by 96 cents in the past two weeks – a lag more than two standard deviations above normal, according to Tran.

“Ultimately, the bigger question remains whether this spreading force needs to be mitigated or if it exhibits a real structural change in fundamentals over the medium term,” Tran said. “Put simply, the structures of the WTI and Brent terms suggest a materially more constructive outlook than just two weeks ago.”