Crude backwardation continues

image credit: James Halliday

After spending the day below the $100/bbl level, the spot WTI contract moved back above this psychological level in overnight trading in a round of short covering after a bullish API report and modest growth data out of China.

The API reported a larger-than-expected draw in crude oil and a modest draw from Cushing (see below for more details). Overnight, the data out of China showed GDP grew at 7.5 percent from a year earlier for Q2. The data point exceeded the market expectations and is slightly above the Q1 level of 7.4 percent.

The stable GDP data out of China suggests the mild stimulus programs in the country are starting to have an impact. In addition, a growing Chinese economy is a positive for oil demand growth and thus supportive for oil prices in the medium term. China will account for about 11 percent of global oil demand this year, compared with 21 percent for the U.S., according to the IEA.

The August Brent contract expires today along with the August Brent/WTI spread. The Aug spread looks like it is heading into the history books close to its range support level of $5.25/bbl. The newly anointed spot spread, Sep Brent/WTI, is currently trading in the upper half of its technical trading range but also narrowing in overnight trading.

The Brent and WTI forward curves are moving in two different directions. The Brent curve is in a solid contango with the economics of storing oil over a three-month period. Things are starting to look economical for Brent-based crude oils, while WTI remains in a backwardation. Based on yesterday’s settle price, the Aug/Oct Brent spread ended the session at a $1.27/bbl contango while WTI showed a $1.02/bbl backwardation for the same period. The structure of the curve suggest a further weakening of the Brent/WTI spread and supportive of my view that the spread will work its way back to a more normal, historical trading relationship during the second half of this year.

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