Brent Crude Moves Into Contango for First Time Since June

Front-month Brent crude settled lower than the second-month contract for the first time since June on concern that slower economic growth will reduce near- term demand.

The European oil benchmark has slumped 6.3 percent this year as the region’s sovereign debt crisis spread from Greece to Italy to Cyprus. European Central Bank President Mario Draghi said yesterday that downside risks remain to the region’s economy. Prices have also declined amid an increase in shipments of crudes in the North Sea blend.

“The contango is an indication that the economy is in bad shape and oil demand is really slowing,” said Rich Ilczyszyn, chief market strategist and founder of commodities trading firm Iitrader.com in Chicago. “There is probably more downside risk going forward.”

Brent for May settlement ended the session 3 cents below June today. The last time the first- and second-month contracts settled in the so-called contango structure was on June 29.

May Brent declined $2.22, or 2.1 percent, to close at $104.12 a barrel on the London-based ICE Futures Europe exchange, the lowest level since July 24. The June contract slid $2, or 1.9 percent, to $104.15.

Brent’s premium to West Texas Intermediate oil, the U.S. benchmark, narrowed to $11.42, the least since June.

Credit Suisse lowered its 2013 Brent price forecast to $112 a barrel from $115 in a research note dated April 3, saying that it’s unlikely commodity demand will be strong enough anytime soon to pull the entire complex higher.

Economic Outlook

“This economic outlook for the euro area remains subject to downside risks,” Draghi said at a press conference yesterday in Frankfurt after the ECB kept its benchmark interest rate at a record low of 0.75 percent.

The European Union accounts for 16 percent of world’s oil demand, according to BP Plc (BP/)’s Statistical Review of World Energy.

“I guess you can call it the Mario Draghi spread,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “He believes that in the short term things are bad, and it means oil demand will be bad.”

Oil demand will be “less than it was before” in the next few months, Maria van der Hoeven, executive director of the International Energy Agency, said yesterday in a Bloomberg Television interview from Paris.

A contango structure typically can signal either declining demand or rising supply, or a combination of both.

Loadings Increase

Daily shipments of Brent, Forties, Oseberg and Ekofisk crudes from the North Sea, which make up the Dated Brent benchmark, will increase by 1.5 percent in May from this month, loading programs obtained by Bloomberg show.

Platts, publisher of benchmark energy prices, last month amended its North Sea Dated Brent crude formula to boost trading liquidity. The price of Ekofisk and Oseberg grades for loading from June will be adjusted to take their superior quality into account, Platts, a unit of McGraw-Hill Cos., said in e-mailed statement.

Royal Dutch Shell Plc (RDSA) proposed changes to the contract it uses to trade North Sea cargoes in February.

“The introduction of quality premiums offers an incentive for more deliveries of Oseberg and Ekofisk, and thus has the potential to further gird the supply of oil underpinning the BFOE complex and the Dated Brent price assessment,” Dave Ernsberger, Platts global editorial director of oil, said last month.

To contact the reporters on this story: Moming Zhou in New York at mzhou29@bloomberg.net; Lananh Nguyen in London at lnguyen35@bloomberg.net

To contact the editors responsible for this story: Dan Stets at dstets@bloomberg.net; Stephen Voss at sev@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.