Futures price contango compresses

Sam Fletcher
OGJ Senior Writer

There has been a gradual compression this year of the futures price contango for key benchmark crudes, with the narrowing most evident at the front of the North Sea Brent curve.

As to when the market will tighten enough to remove the front-month contango completely, Paul Horsnell, managing director and head of commodities research at Barclays Capital in London, said Feb. 18, “An aggressive timing would be as early as next month, although that would require a run of particularly strong data. The slowest likely timing would be June, but we see the current dynamics as favoring a slight flirtation with backwardation by the end of April.”

He said, “The flattening of the very front of the curve seems to have some more urgent momentum.” The fall of commercial crude inventories at Cushing, Okla., in the week ended Feb. 12, “even as overall US crude inventories rose, is one source of support for that transition in West Texas Intermediate, but the process has some broader base beyond just the constructive pattern of Midwest dynamics,” Horsnell said.

The Energy Information Administration said US crude stocks jumped by 3.1 million bbl to 334.5 million bbl in that week, well above Wall Street’s consensus of a 1.7 million bbl gain. Gasoline stocks advanced 1.7 million bbl to 232.1 million bbl, also exceeding a consensus for a 1.5 million bbl increase. Distillate fuel inventories fell 2.9 million bbl to 153.3 million bbl, exceeding analysts’ expectations of a 1.5 million bbl decline but still above average for this time of year (OGJ Online, Feb. 18, 2010).

Crude prices climbed in eight out of nine sessions on the New York Mercantile Exchange Feb. 8-19, falling only in the Feb. 12 session. The front-month crude contract closed at $79.81/bbl Feb. 19, after climbing a total 8% through that shortened week with the New York market closed for the Presidents Day holiday on Feb. 15. Horsnell said, “We expect to see the low point of the range shift upwards in the transition towards a dominant $80-90/bbl range.

Crude prices were relatively flat in early trading Feb. 22. However, natural gas was down more than 2% despite the National Weather Service’s 8-14-day prediction of a “high probability” of unseasonably cold temperatures in the Southeast and Southern Plains in March.

Air, truck freight increases
Horsnell cited a recent Barclays Capital report of a steady rise in the absolute level and year-over-year profile in air freight traffic volumes “that has recovered sharply from a 1% fall in October to a 10% increase in November and a 24% increase in December.”

He said, “With the overall recovery in global distillate demand waiting on a sustained increase in freight volumes and a normalization in final goods inventory to goods sales ratios, the air freight recovery seems to augur well for the path of overall freight volumes.”

He said, “What has been lacking to date is evidence of a sustained uptick in road (and rail) freight. The latest trucking data do, however, seem to suggest that there has been something of a turning point, or to be more precise that the low point for US truck movements is more clearly in the rear-view mirror. The latest American Trucking Association data show a slight month-over-month uptick in trucking mileages for December in the raw data, and a slight month-over-month fall in the seasonally adjusted data. However, it also shows the first year-over-year increase in trucking mileage since June 2008. Using the seasonally adjusted data, the year-over-year increase of 5.9% contrasts with the decline of 16.9% for 2009 as a whole.”

Overall, trucking dynamics “appear to be continuing their gradual improvement, and we are confident enough in that data flow to declare that the low point for US truck freight was indeed reached and passed as long ago as April 2009,” Horsnell said. “It may be apparent in the trucking data, but the evidence of the watershed having been reached has been slower in the weekly oil data. Diesel inventories are at least moving closer to their 5-year average in a constructive manner.”

He added, “The latest weekly reading on distillate demand is, at 3.787 million b/d, the highest of the year so far, but as a herald of better things to come it seems rather muted. The overall overhang of inventories above the 5-year average ticked up by a mild 1.4 million bbl in the latest data, made up of 900,000 bbl of crude and 500,000 bbl of products.

(Online Feb. 22, 2010; author’s e-mail: samf@ogjonline.com)

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