Brent Futures Flip to Backwardation as Middle East Supply Risks Return
Brent Futures Flip to Backwardation as Middle East Supply Risks Return.
The Brent Crude futures curve flipped into backwardation this week, signaling expectations of tight prompt supply for the first time in a month, as the market started pricing in the renewed hostilities in the Middle East, collapsed tanker traffic through the Strait of Hormuz, and the reinstated U.S. naval blockade on Iranian oil exports.
The September contract at $85.79 per barrel early on Wednesday was about $8 per barrel higher than the Brent contract six months later, which traded at $77.49 a barrel.
The futures curve this week flipped to backwardation, the market structure in which prompt contracts trade higher than those further out in time, signaling concerns about immediate supply.
The first-month Brent contract hit $8.92 a barrel above the sixth-month contract, reaching the largest premium since June 10, days before the U.S. and Iran signed the now all-but-dead memorandum of understanding, according to data compiled by Reuters .
Prices of both Brent Crude and the Middle Eastern benchmarks – the Dubai, Murban, and Oman futures – sank after the U.S. and Iran announced a memorandum of understanding to launch peace talks and reopen the Strait of Hormuz, and the U.S. lifted its blockade in the Gulf of Oman that was aimed at stopping Iran's oil exports.
In the middle of June, as a result of the eased concerns about prompt crude supply from the Middle East region, the key benchmark crudes, Dubai and Murban , saw their futures curve structure on Tuesday flip to contango for the first time since the war began on February 28.
The contango structure, in which prices for contracts dated further out in time are higher than the prompt contracts, suggests that concerns about the immediate lack of crude supply had eased.
But this contango structure lasted just short of a month as hostilities returned this weekend, Iran struck tankers in the Strait of Hormuz, and the U.S. hit Iranian targets and reinstated the naval blockade.
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