US oil futures show oversupply for first time this year

(Bloomberg) — The structure of the U.S. crude market is signaling oversupply for the first time in nearly a year, the latest indicator of the scale of the dramatic downturn in the near-term oil futures market.

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The front-month spread, which reflects short-term supply-demand balances, traded in contango — the industry term for bearish market structure — before the December contract expired on Monday. Another later spread was also converted to contango. The rest remain in the opposite bullish structure, known as a pullback, indicating that the move could still be short-term.

Much of the move can be attributed to futures investors amassing a bloated market position and heading for the exits at the same time as nominal prices plummet on demand concerns, market players said. Underlying physical market weakness and short-term factors such as the Texas pipeline outage and high freight rates also led to a collapse in timing, with West Texas Intermediate futures falling below $80 for the first time since September.

Friday’s plunge also coincides with the expiration of options contracts in the December-January spread. There are nearly 13 million barrels of put options that will benefit if the spread ends in contango. When options move to the levels at which they pay, they can stimulate additional selling.

“The bottom line here is that demand for oil from Asia is not good and while it may be decent in the US, it is struggling with the pipeline disruption that is slowing exports and creating weakness that could last for a few weeks,” said Scott Shelton. , energy specialist at TP ICAP Group Plc. “The market position was just the opposite, which forced the liquidation and made it even worse.”

Contango can make it more profitable for traders with access to storage to put oil in tanks and sell later, depending on the extent of the gap between prices. If the oil markets are in collusion for an extended period, it also creates the so-called negative roll yield, where investors tend to lose money when they advance a position from one month to the next.

Weakness in US crude prices has played out in physical markets in recent days. Crude at Magellan Midstream Partners LP’s East Houston terminal is trading at its lowest level since May, according to Bloomberg fair value data. Permian oil is also at a near six-month low, the data showed, with a vital regional pipeline operated by Shell Plc operating at reduced rates.

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