Wednesday saw another draw in crude stocks at the Nymex WTI delivery point at Cushing, Oklahoma. With that, many in the market are now expecting a continued flattening of the WTI futures curve away from its current super-contango state, as well as the end of Brent’s premium to WTI.
A reminder: it was record near-capacity stocks at Cushing — from which supplies can only run in one direction –that led to the depression of WTI versus other grades in the first place. The chart below illustrates how stocks have recently come off.
The rationale for the above goes like this: decent draws at Cushing should incentivise oil currently stored in floating storage or tanks to be brought inland. As this contango trade is unwound, forces should push WTI back to its traditional premium to Brent, especially since there is also plenty of Forties crude (a key component in the marking of the dated-Brent price) being stored in floating barrels too.
As WTI returns to a premium at the front end, the effect is support for the overall front-end oil price (as people return to purchase WTI over Brent). Restocking of floating storage meanwhile sees further selling into the curve (or the buying of time spreads), flattening the curve out of contango at first — but potentially seeing it revert as storage once again becomes full.
In the view of many analysts, among them Goldman Sachs, however, it is only once the contango is removed that a new oil-price rally can take shape. Consequently, a flattening contango creates a more bullish outlook for the crude price.
Certainly, while WTI still remains at a discount to Brent, the spread has narrowed significantly. This is especially the case further down the curve where WTI has even reverted back to a premium.
Related links:
Bye bye oil contango? – FT Alphaville
Goldman calls bottom in oil, again – FT Alphaville
Is it a bird? No, it’s a super-contango - FT Alphaville