By Bloomberg, via RigZone.com |Julia Fanzeres and Alex Longley| Oil held steady after the biggest daily gain in a month as US crude’s prompt spread strengthened and stockpiles logged their third consecutive weekly decline.
West Texas Intermediate edged below $83 after advancing 2.6% on Wednesday. Nationwide inventories shrank by 4.87 million barrels last week to the lowest level since February. The data strengthened WTI’s prompt spread — the price difference between its two nearest contracts — to $1.52 in backwardation. The bullish pattern signals demand is outweighing supplies in the short term.
Meanwhile, in Canada, wildfires once again threatened 400,000 barrels a day of oil production, putting piped shipments to the US at risk. The fires helped boost Canadian heavy crude prices.
Oil has risen about 15% on OPEC+ production cutbacks this year, which have offset increased volumes from nations outside the cartel. The group will hold a market monitoring meeting next month, at which no changes to its fourth-quarter output plans are expected.
Recently, US prices have gained faster than the global Brent benchmark. That has left WTI with its smallest discount relative to Brent since October.
Prices:
- WTI for August delivery was little changed to settle at $82.82 a barrel in New York.
- Brent for September settlement was little changed at $85.11 a barrel.
UNDERSTANDING THE OIL PROMPT SPREAD
The oil prompt spread, also known as the time spread or calendar spread, refers to the difference in price between two oil futures contracts with different delivery dates. This spread can provide insights into market expectations and the balance between supply and demand. When the spread is positive (contango), the oil price for future delivery is higher than the spot price, often indicating an oversupply or weak immediate demand. Conversely, when the spread is negative (backwardation), the spot price is higher than future prices, suggesting strong immediate demand or concerns about future supply.
The prompt spread is crucial for traders as it offers hedging and speculative trading opportunities. For instance, a trader might buy a nearer-term contract and sell a longer-term one in anticipation that the spread will widen in contango, profiting from the price difference. This trading strategy helps manage risk and can provide returns irrespective of overall price movements in the oil market. Understanding the dynamics of the prompt spread is essential for making informed decisions in the complex and volatile world of oil trading.
