The US crude market’s structure is signaling oversupply for the first time in almost a year, the latest indicator of the scale of the dramatic slump in the nearest section of the oil futures market.
The front-month spread, which reflects short-term supply-demand balances, traded in contango -- the industry term for the bearish market structure -- ahead of the December contract’s expiry on Monday. One other subsequent spread also flipped to contango. The rest remain in the opposite bullish structure, known as backwardation, indicating the move could yet be a short-term one.
Much of the move can be attributed to futures traders amassing a bloated long position and heading for the exits at the same time as headline prices plummet due to demand worries, market participants said. Underlying physical market weakness and short-term factors such as a Texas pipeline outage and high freight rates have also led to the collapse in timespreads, while West Texas Intermediate futures fell below $80 for the first time since September.
Friday’s plunge also coincides with the expiry of options contracts on the December-January spread. There are almost 13 million barrels of put options that would profit if the spread expires in contango. When options move through the levels at which they pay out, they can spur additional selling.
