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Oil investors load up on near-month Brent amid tightening supplies
[NEW YORK] Oil investors are piling into front month Brent crude, pushing it to a rare premium over forward prices as they bet on tightening supplies due to demand from Korea, loading delays in Iraq, and North Sea maintenance. "The market is in the process of realizing that there's a change in the fundamentals this year," said Ann-Louise Hittle, lead oil market analyst at Wood MacKenzie.
Brent and benchmark US crude have both been locked in a structure known as contango, in which forward months are at a premium to the prompt month.
The prompt Brent spread LCOc1-LCoc2 flipped out of contango and into backwardation on April 7 for the first time in three months.
On Wednesday, Brent for June traded to as much as 7 cents a barrel over Brent for July, though it settled at a 3-cent discount.
This week, the one-year Brent spread LCOc1-LCOc12 traded at its tightest since late 2014, just after the start of the oil price rout that effectively slashed the value of crude by nearly 75 per cent.
The strength was fueled in part by hedging activity from airlines, which bought significant oil price hedges for 2017 and 2018 last week.
Anticipation of a meeting this Sunday in Doha, at which oil producers will discuss a potential output freeze has also fueled buying, traders and analysts said.
"We've got a growing perception that supply and demand is starting to balance in the second half of 2016," said Mark Routt, Chief Economist in the Americas for KBC Advanced Technologies. "This is perhaps a premature response to that."
The Brent contracts have risen amid North Sea maintenance that is likely to reduce output of some of the crudes that comprise the benchmark.
At the same time, demand for North Sea oil from South Korea may have picked up after falling earlier in the week, with the country buying cargoes of Forties crude, sources said, which underpins the physical Dated Brent contract.
Brent may also rise due to loading delays in Iraq, Mr Routt said. Middle-eastern crude buyers could have hedges in the futures market, and could need to buy up contracts if cargoes were delayed.
US imports rose by 686,000 barrels per day (bpd) to 7.6m bpd in the latest week, indicating that US demand for imported oil may be ticking up, further supporting Brent.
The oversupply of crude which has weighed down the market may be easing, in part due to Brent, which is likely to see production declines due to low investment in a low-price environment, said Bob Yawger, director of the futures division at Mizuho in New York.