Brent oil contango is widest in three months as surplus piles up

[LONDON] Brent crude futures traded at their deepest discount to later-dated contracts since June, signaling the global oil surplus is growing more severe.

The spread - or contango - on front-month Brent compared with the next-month contract widened to as much as $1.17 a barrel, the most since June 15, a sign that immediate supplies still exceed demand. The glut may also be reflected in US crude inventory data due Wednesday, with stockpiles that are already 100 million barrels above the seasonal norm projected to have increased 1.75 million barrels last week, according to a Bloomberg survey.

"It signifies a material oversupply," Seth Kleinman, head of energy strategy at Citigroup Inc in London, said by phone of the expanding spread.

"US production is not going down fast enough given the continuous growth we seem to be having from Opec."

Oil has slumped about 30 per cent from this year's closing peak in May amid signs the global surplus that drove prices to a six-year low will persist. Goldman Sachs Group Inc said last week that the excess is bigger than it initially anticipated and crude could fall as low as US$20 a barrel.

Brent for October settlement, which expires Tuesday, rose as much as 53 cents, and was up 24 cents at $46.61 a barrel on the London-based ICE Futures Europe exchange at 1:50 pm local time. The more-active November contract climbed 40 cents to $47.75. The front-month European benchmark crude traded at a premium of as little as $2.09 to West Texas Intermediate, the narrowest gap since January.

WTI for October delivery gained 35 cents to $44.35 a barrel on the New York Mercantile Exchange. The volume of all futures traded was about 5 per cent below the 100-day average for the time of day. Prices have decreased 17 per cent this year.

Increasing supplies from Opec members such as Iraq are adding to the surplus, Citigroup's Kleinman said. Iraq plans to increase exports of crude from its southern region by 26 per cent next month, with a combined 81 cargoes of Basrah Light and Basrah Heavy grade crudes totaling 114 million barrels, according to a loading program obtained by Bloomberg News.

The Organization of Petroleum Exporting Countries trimmed its estimates for growth in output from outside the group next year by 110,000 barrels a day in its monthly market report. Supplies from non-Opec nations such as the US, Canada, Russia and Brazil will increase by 160,000 barrels a day to 57.6 million in 2016, the group's Vienna-based secretariat said Monday.

The projected increase in US crude stockpiles for the week through Sept 11 coincides with a drop in refiners' operating rates as gasoline demand slips with the end of summer's driving season. The Energy Information Administration report will be published at 10:30 am in Washington on Wednesday.

"We've probably seen the floor, but I wouldn't expect to see any strong rally in the near term because the surplus that pushed oil down is still there," David Lennox, an analyst at Fat Prophets in Sydney, said by phone.

BLOOMBERG