U.S. Oil Contango Widest in Five Months as Stockpiles Weigh

Updated on
  • WTI front-month contract settles at lowest level in 2 months
  • Inventories highest for October since 1930 amid robust supply

The discount on front-month U.S. crude futures widened to the most in five months after inventories reached the highest level for the season in 85 years.

West Texas Intermediate futures for December delivery closed at 92 cents less than January, the widest spread -- also known as contango -- since May. U.S. crude inventories have risen 5 percent in the past four weeks to 477 million barrels, the highest for the time of year in data going back to 1930, as the nation’s production pulls back only gradually in response to lower prices.

Oil failed to sustain a rally earlier this month above $50 a barrel as surging U.S. inventories bolstered speculation that a global glut will be prolonged. World crude supplies will remain ample until at least the middle of 2016 while investment in the industry is set to shrink further, International Energy Agency Executive Director Fatih Birol said in Singapore on Monday.

"You are going to see some massive builds coming up," said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. "The widening contango is going to encourage more storage and put more pressure on spot prices."

Saturated Market

WTI for December delivery fell 62 cents to end at $43.98 a barrel on the New York Mercantile Exchange, the lowest close since Aug. 27. The volume of all futures traded was about 30 percent below the 100-day average.

Brent for December settlement was 45 cents lower at $47.54 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude traded at a premium of $3.56 to WTI.

Investors weighed a smaller reduction last week in the number of U.S. drilling rigs at work against an interest rate cut in China.

Rig Count

The number of active machines targeting oil dropped by 1 through Oct. 23 after declining by 45 over the prior three weeks, according to Baker Hughes Inc. The rig count fell to 594, the lowest level since July 2010. Drillers have cut the number of active machines by more than 60 percent since December.

"Crude has to be put in storage," said Gene McGillian, a senior analyst at Tradition Energy in Stamford, Connecticut. "There isn’t enough demand."

Alarmingly high” distillate fuel storage in the U.S. and Europe may force refiners to cut runs and impact oil prices, according to Goldman Sachs Group Inc. Near-record refinery runs, modest demand growth and more supplies from the Middle East and China have pushed distillate stockpiles close to their highest levels, analysts including Damien Courvalin wrote in an Oct. 25 report.

Oil at $50 a barrel is a “gift to the world” as prices should be low enough to spur economic growth, according to Ali Al Mansoori, chairman of the Department of Economic Development in Abu Dhabi. Crude may climb to $60 by the end of next year, he said in an interview Sunday in the capital of the United Arab Emirates, the fourth-largest producer in the Organization of Petroleum Exporting Countries.