A key indicator of the oil market shows signs of oversupply in the U.S., which is the latest indication that a global supply glut is imminent.
The so-called spot price spread (measuring the price difference between futures for immediate delivery and those for delivery in a month) has turned negative for the first time since February. This reflects a bearish market structure known as Contango (futures premium), signaling ample supply recently.
On Monday, at its lowest point, the spread was a discount of 5 cents per barrel, ultimately settling at a discount of 1 cent.
The International Energy Agency (IEA) has warned that by 2025, the daily surplus will exceed 1 million barrels. The agency stated that if OPEC and its allies restore production next year, inventories could swell further. Currently, other parts of the U.S. crude oil futures curve still maintain a slightly bullish spot premium structure.
Futures premium can create significant ripple effects in both financial and physical markets. For companies with oil storage capacity, a sustained and deep futures premium allows them to store oil in tanks and sell it later at a higher price.
For financial participants, this structure creates what is known as a 'negative rolling yield', meaning investors incur losses when rolling forward positions.
Inventories at the futures delivery point in Cushing, Oklahoma, are generally in line with recent seasonal standards, but U.S. crude oil production continues to surge, setting a new record of over 13 million barrels per day. According to IEA data, as of September, China, the world's largest crude oil consumer, has seen its oil consumption decline for six consecutive months.
Oil prices surged on Monday as imminent geopolitical tensions and a weak dollar overshadowed bearish signals from domestic market indicators. Bullish investors continued to bet on rising prices by selling December contracts set to expire this Wednesday and buying futures for later dates.
Robert Yawger, head of Mizuho Securities' U.S. Energy Futures Division, said, 'It is rare for spot prices to rise nearly 3% while the curve is under pressure and potentially turning to a futures premium. However, what is more likely to happen is that speculators rush to sell positions before expiration, selling at the front of the curve and buying further out.'
Rebecca Babin, senior energy trader at CIBC Private Wealth Group, said that speculation about Ukraine's boldness possibly putting Russian energy assets at risk, along with increasing speculation about direct U.S. and North Korean intervention, has also reduced the urgency to sell these assets.
Article reposted from: Jin Shi Data