US oil futures point to oversupply for the first time this year

US oil futures point to oversupply for the first time this year

Buzz Update US oil futures point to oversupply for the 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 depth of the dramatic fall in the section closest to the oil futures market.

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

Much of the move can be attributed to futures traders accumulating an inflated long position and heading for the exits at the same time as overall prices fall on demand concerns, market participants said. Underlying weakness in the physical market and short-term factors such as a Texas pipeline outage and high freight rates also caused time spreads to collapse, while West Texas Intermediate futures are fell below $80 for the first time since September.

Friday’s dip also coincides with the expiration of December-January spread option contracts. There are nearly 13 million barrels of put options that would profit if the spread expired in contango. When options cross the levels at which they are paying, they can stimulate additional selling.

“At the end of the day oil demand here from Asia is not good and while it may be decent in the United States, it is struggling with the pipeline failure which is slowing exports and generating a weakness that can last for a few weeks,” Scott Shelton said. , energy specialist at TP ICAP Group Plc. “The market positioning was the exact opposite, which forced the sell-off and made the situation worse.”

Contango can make it more profitable for traders with access to storage to put oil in tanks and sell at a later date, depending on the size of the price gap. If oil markets are in contango for an extended period, this also generates what is known as negative rollover, where investors tend to lose money when they roll a position from month to month. ‘other.

The weakness in light crude prices in the United States has manifested itself in physical markets in recent days. Crude at Magellan Midstream Partners LP’s East Houston Terminal is trading at the lowest level since May, according to fair value data from Bloomberg. Permian oil is also at its lowest in almost six months, the data shows, with a vital regional pipeline operated by Shell Plc operating at reduced rates.

(Updates with more information throughout.)

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