Flip in Brent structure points to drop in oil stocks Wed Jul 18, 2007 By Jane Merriman - Analysis
LONDON (Reuters) - Brent oil futures have shifted into backwardation, a market condition that points to expectations of a tighter supply/demand picture that could shrink plentiful crude stocks.
The return of backwardation -- where crude for nearby delivery costs more than crude further forward -- could provide a signal for OPEC that crude oil supplies are no longer as abundant, potentially paving the way for a production increase. "With backwardation, the market is starting to price in a very large crude oil draw," said Olivier Jakob, of oil consultants Petromatrix.
"I think OPEC is waiting to see if those big draws materialize or not." These supply concerns helped on July 16 to drive Brent crude to within 25 cents of its record high of $78.65 a barrel.
The backwardation may not last, but while it does it removes a financial incentive to store oil. "The important thing is that the storage play doesn't work any more," said Paul Horsnell, head of commodities research at Barclays Capital. "You can no longer lock in money by holding crude in inventory for trading purposes." …
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