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Brent contango narrowing on possible OPEC+ action, recovering Asian demand

Brent crude oil futures’ spreads in 2021 have narrowed significantly as demand from Asia has been strong and markets remained hopeful that OPEC and its allies could extend their output cuts.

The Brent front month contango, whereby later-delivery contracts are more expensive than earlier-delivery contracts, stood at -16 cents a barrel earlier in the session. It was a -12 cents on Monday, the shallowest since July.

A deep contango means front month prices are below prices for later-delivery contracts, allowing traders to make money by storing crude onshore or in some cases at sea and selling it later when prices are higher.

A shallow contango in contrast makes storage less feasible and encourages traders to sell oil now because prices could be lower in the future. Falling inventories can be bullish for oil prices and signal periods of under-supply.

Reuters Graphic

“The oil futures calendar spread contango has noticeably narrowed in the past week, likely due to vaccine announcements spurring 2021 recovery hopes,” Oanda analysts said after several pharma groups announced progress on coronavirus vaccine trials this month.

The six-month Brent contango spread from January to July was as shallow as 87 cents on Thursday, also shallowest since July.

In April, Brent’s front month contango dropped to -$5 when many countries around the world imposed lockdowns to curb the spread of the coronavirus and supply surged.

Reuters Graphic

“The reduction of the contango in the Brent (structure), also taking place in the Dubai term structure, owes to the combination of elevated OPEC+ compliance with pledged supply cuts, but also to a strong recovery in Asian oil demand,” BNP Paribas analyst Harry Tchilinguirian said.

OPEC+, which groups the Organization of the Petroleum Exporting Countries, Russia and others, is considering delaying a plan to boost output by 2 million barrels per day (bpd), or 2% of global demand, in January to support the market.

Saudi Arabia called on fellow OPEC+ members on Tuesday to be flexible in responding to oil market needs as it builds the case for a tighter oil production policy in 2021 to tackle weaker demand amid a new wave of the coronavirus pandemic.

While the COVID-19 pandemic has reduced oil consumption globally, China is the only major buyer expected to see increased oil demand this year.
Source: Reuters (additional reporting by Ahmad Ghaddar and Florence Tan in Singapore; editing by David Evans)

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