Oil Futures Spreads Signal Market Moving Toward Oversupply (Reuters) — Spot global crude oil futures traded at a discount to longer-dated contracts this week for the first time in four months, a signal that traders believe the market has become oversupplied and inventories are poised to build.
A switch to contango, which gives traders an incentive to buy and store fuel, came this week as crude futures fell to the lowest since mid-July on concerns about weaker near-term demand. Traders who two months ago predicted oil could hit $100 per barrel by next month are unloading near-term bets.
U.S. West Texas Intermediate's front-month contract on Thursday traded as much as 23 cents lower than the second-month contract, and up to 29 cents lower than prices for purchases six months out.
The international benchmark Brent also switched into contango on Thursday, with the front-month contract trading 13 cents lower than second-month prices.
Weaker economic and oil demand data from the U.S. and China, the world's largest energy consumers, came alongside U.S. government data that showed a rise in U.S. crude inventories and a record 13.2 million barrels per day (bpd) of domestic oil production.
Refilling Storage
Traders pointed to an ongoing refilling of the Cushing, Oklahoma, oil storage hub that helped prompt the switch to contango.
Inventories at Cushing in mid-October had dropped to a concerning 21.01 million barrels in mid-October, close to operational lows. They rose to 25.01 million barrels in the week to Nov. 10, U.S. Energy Information Administration data showed.
"We have seen significant increases in Cushing taking away the fear of a supply squeeze," said Phil Flynn, an analyst at Price Futures Group. "All the people that were in that trade are going the other way."
U.S. refiners have trimmed production runs and oil exports are elevated at about 4.9 million barrels per day in the latest week, EIA data showed. Those factors have added to sentiment that supply is not tight, said John Kilduff, partner at Again Capital LLC in New York.