(John Kemp is a Reuters market analyst. The views expressed are
* Chart 1: Shape of futures price curve in Brent crude http://tmsnrt.rs/2Ge1dRq
* Chart 2: Brent calendar spread for second half of 2018 http://tmsnrt.rs/2pxje2V
By John Kemp
LONDON, March 22 (Reuters) - Brent calendar spreads have
risen significantly over the last week, erasing an earlier
decline and indicating traders have become more bullish about
the outlook for the oil market later this year.
The Brent calendar spread for the second half of 2018, which
measures the difference in price between futures for delivery in
June and December, has climbed to more than $2.50 per barrel
from $1.65 on March 13.
Calendar spreads reflect expectations about the balance
between supply and demand in the physical market, and are seen
by many traders and investors as a more useful signal than spot
The relationship between spreads and inventories was
identified by economist Holbrook Working in the grain market
("Price relations between July and September wheat futures at
Chicago since 1885 https://ideas.repec.org/a/ags/frisws/142876.html
”, Working, 1933).
But similar relationships between spreads and inventories
exist in other commodities including Brent crude.
By convention, calendar spreads are normally expressed as
the price of the nearer futures contract minus the price of the
contract with longer until expiry.
Negative spreads, known as “contango”, when the price of the
nearby contract is below the longer-dated one, are correlated
with high and rising inventories, when production exceeds
Positive spreads, termed “backwardation”, when the price of
the nearby contract is above the longer-dated one, are
correlated with low and falling inventories, when production
falls short of consumption.
For the last quarter of a century, Brent crude futures have
cycled between contango and backwardation as the global oil
market has alternated between periods of over- and under-supply.
Brent calendar spreads have been one of the most useful and
reliable indicators of the changing balance in the global oil
The Brent spreads have been gradually moving from contango
to backwardation since early 2015 or early 2016 as the oil
market has gradually rebalanced after the slump in 2014/15.
Recently, however, the calendar spreads appeared to peak and
start softening, coinciding with a downturn in spot prices.
Traders and investors seemed to react to an unexpected surge
in crude and condensates output from U.S. shale producers.
Forecasts showed additional production from the United
States as well as Brazil, Canada and Norway would be more than
enough to meet the increase in oil consumption this year.
Hedge funds and other financial investors have been
gradually reducing their bullish positions in crude oil over the
last seven weeks, intensifying the downward pressure on spreads
and spot prices.
But in the last week, both spreads and spot prices have
rallied sharply http://tmsnrt.rs/2pxje2V, regaining most of the
ground lost during February and March, suggesting a return to a
more bullish sentiment or at least a tempering of bearishness.
Oil prices and spreads do not rise and fall in straight
lines or even in a simple cyclical pattern. In addition to the
main cycle, there are smaller epicycles operating at various
time-scales from months to weeks, days or even minutes and
The weakening of the spread since early February appears to
have been one of those epicycles within the framework of a
larger cyclical upswing, but that epicycle seems to have
reversed course over the last week.
The reasons are not entirely clear, but could include rising
tensions between the United States and Iran, OPEC discussions to
tighten its inventory target, or another factor entirely.
Some epicycles arise from within the market itself, rather
than as a result of fundamental external factors, as prices move
in response to the accumulation and liquidation of positions by
The bigger question is whether the oil market is still
tightening - or whether the rise in prices since June 2017 has
already done enough to ensure supply will match demand for the
rest of 2018 and into 2019.
“Funds trim bullish oil positions, but no rush for exit https://www.reuters.com/article/uk-oil-prices-kemp/commentary-funds-trim-bullish-oil-positions-but-no-rush-for-exit-idUSKBN1GW1B9
”, Reuters, March 19
“Oil rally stalls amid rising production forecasts https://www.reuters.com/article/uk-oil-prices-kemp/commentary-funds-trim-bullish-oil-positions-but-no-rush-for-exit-idUSKBN1GW1B9
”, Reuters, March 8
(Editing by Edmund Blair)
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