This month, there has been a growing discrepancy in the crude markets between growing stocks and rising spot prices and calendar spreads. Even while there was an excess of supply in the oil market in the second quarter, many analysts and OPEC anticipate a significant shortfall in the third, which would result in a steep decline in inventories. At their highest point since late April, when traders were still concerned about an open conflict between Israel and Iran, front-month Brent futures have risen to about $87 a barrel.
Prices for nearby futures have been increasing far more quickly than those for later delivery; Brent’s six-month calendar spread has increased from $2 a barrel to a backwardation of over $4 a barrel. This severe reversal, which is in the 92nd percentile for all trading days since the century’s beginning, would often be accompanied by a shortage of oil and a rapid depletion of stocks.
Contrary to the seasonal tendency, crude stocks have been rising over the last two months as opposed to falling, suggesting that the market has been oversupplied as opposed to undersupplied. During the nine weeks that concluded on June 21, commercial oil stocks in the United States rose by 7 million barrels, although during the same period in the previous ten years, there was an average depletion of 10 million barrels.
The net effect was that by June 21, inventories were 6 million barrels (+2% or +0.12 standard deviation) higher than the previous 10-year seasonal average, eliminating an 11 million barrel (-2% or -0.22 standard deviation) deficit from April 19. From a surplus of 8 million barrels (+3% or +0.23 standard deviation) nine weeks prior, Gulf Coast inventories were 25 million barrels (+10% or +0.79 standard deviation) over the ten-year average on June 21.
In the Midwest, however, where Cushing, Oklahoma, serves as the delivery point for the NYMEX WTI contract, there is a clear divergence between growing spot prices, acute backwardation, and inventories. After falling short of the seasonal average by 12 million barrels (-27% or -0.89 standard deviation) on December 15, Cushing inventories were 10 million barrels (-22% or -0.66 standard deviation) below it on June 21. In contrast to a contango of 88 cents in mid-December, the three-month WTI calendar spread at Cushing is currently trading in a backwardation of more than $2 a barrel.
