By Barani Krishnan
Investing.com - Oil prices dipped on Monday, moving the U.S. crude complex into a so-called contango structure amid concerns about surging supplies as prices hit more than double from a year ago.
April, the front-month contract for West Texas Intermediate, the New York-traded benchmark for U.S. crude, settled down 22 cents, or 0.3%, at $65.39 per barrel.
But WTI for nearby May settled at $65.44, down 20 cents. While the difference at settlement between the two contracts was just 5 cents, it was much higher earlier when U.S. crude hit an intraday low of $64.17. More importantly, the front-month’s discount to the nearby month created a situation called “contango”. If the difference is allowed to widen, as it has in the past, when it reached $3 a barrel or more, it would encourage oil to be stored rather than traded promptly — creating a bearish market structure.
The spot May contract for Brent, the London-traded global benchmark for crude, settled at $68.88, down 34 cents, or 0.5%. June Brent settled at $68.33. That kept Brent’s spot contract at a premium to the nearby month, maintaining a so-called “backwardation” that encourages prompt delivery of oil — a bullish factor.
“A bearish contango structure for WTI is not surprising, given the strong build over the past couple of weeks,” said Ed Moya, analyst at New York’s OANDA. “The crude demand outlook still remains the key for higher prices and if short-term risks continue to grow due to virus variants, oil prices could be in for modest 10% pullback.”
At Monday’s settlement at above $65, WTI was more than double the $28 per barrel it traded on March 16, 2020. Much of the 130% gain over the past year has been on the hype of demand recovery on the back of the economic rebound from the Covid-19.
In reality, oil prices were bolstered more by production cuts than actual demand over the past 12 months.
U.S. crude output is down 17% since March 2020 record highs of 13.1 million barrels daily to 10.9 million. But output has overtaken the pace of refining over the past three weeks due to storm disruptions in Texas, the epicenter of U.S. energy. U.S. crude stockpiles have grown faster than inventories of fuel products such as gasoline and distillates since the Texas storms.
In Monday’s trade, both WTI and Brent were pulled down by a ramping dollar, which typically makes commodities denominated in the greenback costlier for non-holders of U.S. currency.
The other worry was the decision by Germany, France and Italy to halt AstraZeneca’s COVID-19 vaccine following reports of recipients falling ill.