The Crude Oil Futures Market Structure

The contango in the Brent, WTI and Dubai market structures narrowed over the month as demand continued to improve in all regions and the oil glut started to ease. The contango in the Brent market structure narrowed slightly over the month amid increasing refinery runs, but Atlantic Basin oversupply limited the improvement. An overhang of Nigerian grades, as well as limited North Sea light sweet crude arbitrage to Asia, continued to weigh on the light sweet complex in Europe. Nevertheless, Brent’s first-month discount to the third month dropped by 68¢ to $1.08/b. Similarly, the US WTI contango narrowed sharply from $2.55 to $1.20/b (M1–M3) as crude stock draws took place amid increasing refining activities and signs of slowing production helped clean up surplus crude. The latest EIA data show that refining utilization increased to more than 93% of capacity and is moving up as US refineries return from turnaround and peak summer demand approaches. The Dubai contango structure narrowed by almost 40¢ to 80¢/b amid robust demand as Asia-Pacific refiners capitalized on healthy refining margins. Slightly lower avails of heavy Middle East crudes also helped in narrowing the gap between M1 and M3.

The Brent–WTI (transatlantic) spread narrowed slightly from $6.50/b in April to $6.25/b in May. The North Sea Brent market was under pressure relative to WTI due to several bearish factors. Hound Point jetty maintenance forced more of the North Sea (mainly Forties) crude to stay in a region that is already overwhelmed with unsold West African and Caspian barrels. Moreover, most of the usual buyers in the region were already heard to have built up plentiful stocks of Forties crude over the last few months.

Refinery maintenance is also hitting the Northwest Europe region with planned downtime in May and June averaging around 750,000 b/d, up around 50% y-o-y for this period. On the other hand, WTI was supported by higher refinery intake, five consecutive weeks of declines in crude oil stockpiles and signs of lesser crude oil production growth in the US. US crude's relative strength was attributed to stronger US demand, led by gasoline, as the peak season for road travel kicked in.