For many traders, contango and backwardation provide a view of the markets and the future direction of prices for the commodity in question. Oil is certainly no different, and in normal circumstances, the market cycles between these states on a regular basis. However, the difference in the oil market at present is that we have a contango ( some may call it a “super contango”) between US crude oil and London Brent. Traditionally Brent Crude has traded at a slight discount to West Texas Intermediate (WTI), but in the last few weeks this relationship has reversed dramatically, with the two markets trading at a large spread, which at one point last week stood at well over $10.  What is abnormal about the current situation is that West Texas Intermediate is a lighter sweeter grade than London Brent Crude, and therefore much easier to process into products such as gasoline. Many oil analysts are blaming this divergence in oil prices on the continuing weakness in demand for oil, coupled with the stock piles which it is believed have been built up at the Cushing storage hub in Oklahoma ( along with others ). To add to the problem, US EIA initial energy stats showed gasoline consumption fell by around 3% last year, the first fall in demand since 1991 while distillate demand was also down by around 6%.

Whilst there is no official information on the levels of oil being stored at Cushing, current estimates put this at around 41 million barrels, with refiners putting crude oil into storage rather than into the markets. With the facility full to capacity, some analysts anticipate this will put further pressure on the contango, increasing the spread between the two, a situation many experts believe could remain in place for some time to come. Indeed, as I wrote recently, Cushing is not the only place in the world that is storing oil at the moment. It was widely reported by Bloomberg last week that Morgan Stanley is seeking a supertanker to store oil, along with Citigroup and Royal Dutch Shell, in order to profit from higher prices later in the year, and estimates now suggest there is sufficient oil stored “at sea” to service the world for a day. The oil market has now become a question of who blinks first, and as long as this contango remains in place then the storage at Cushing will remain full.

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