U.S. crude prices retreated after coming within striking distance of their 2017 high on Wednesday, raising questions about whether a rally that started in June has reached its peak.
On the one hand, the trend of future oil prices suggests that a prolonged global glut of crude is coming to an end. But at these elevated levels, prices are also susceptible to disappointing data points and profit-taking as traders look to cash in on recent gains. Crude futures shed more than $1 a barrel on Wednesday after government data showed U.S. crude stockpiles declined less than earlier industry figures indicated. The Energy Department’s report also showed U.S. oil exports hit an all-time high, while the nation’s production crept toward record levels. U.S. West Texas Intermediate crude prices ended the session down 8 cents at $54.30 a barrel and were trading near that level on Thursday. International benchmark Brent crude settled 45 cents lower at $60.49 and was slumping toward $60 a barrel on Thursday.
Still, in a much-anticipated development, U.S. crude futures have flipped into backwardation over the next six months. That means prices for future delivery are less expensive than contracts to ship oil at an earlier date. The six-month spread hasn’t closed in backwardation since November 2014, just before prices crashed, according to Roberto Friedlander, head of energy trading at Seaport Global Securities. “That’s a real big deal. The curve is telling you that the tightening of supplies is happening,” Friedlander told CNBC. “It’s symbolically very important.”
The flip into backwardation helps to tighten the market in several ways. Traders have less incentive to hold crude in storage because they stand to make more by selling it immediately. It also prevents U.S. shale drillers from locking in higher future prices with buyers, which tends to rein in their production. Resurgent U.S. output, fueled by higher oil prices early in the year, made it harder for crude exporters to drain brimming global stockpiles. OPEC and other producers including Russia are keeping 1.8 million barrels a day off the market in order to drive down inventories to their five-year average. “The contango is coming out of the WTI market as inventories of crude oil and petroleum products continue to decline, and if that phenomenon continues, we’ll see a further liquidation of crude oil stocks in the U.S.,” said Andrew Lipow, president of Lipow Oil Associates, referring to the opposite of backwardation.
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