Crude backwardation slumps as IEA bolsters US inventory release

Quantum Commodity Intelligence - Backwardation in the Middle East Dubai crude benchmark slumped to a two-month low Thursday after the IEA announced it would coordinate an initial 120 million-barrel government inventory release, likely in the second quarter.

The one-year cash Dubai forward curve (Jun22/May23) retreated by over $3/b on the day Thursday, falling below $10/b for the first time since January, according to Quantum data, having dropped more than 50% over the past week.

Likewise, the 12-month Brent forward curve retreated from $13.11/b on Wednesday to $9.68/b, based on the 1630pm Singapore timestamp, having settled at $21.23/b on March 30.

Both benchmarks had surged to record highs of more than $30/b on the one-year structure on March 9, which coincided with the near 14-year highs in outright prices and reports that Europe would join a US embargo against Russian oil.  

Flows

But market structures have rowed back sharply in the last four weeks as Russian oil largely continues to flow, while the strategic oil release pledges – now totalling 240 million barrels – further crunched the forward curve, particularly on the front end where the oil releases are targeted.

"The prompt (M1/M2) Brent timespread has fallen sharply over the last month. This suggests that many in the market were assuming a bigger impact on Russian oil flows than we are currently seeing," said Warren Patterson, head of ING's commodity research, noting the physical North Sea market has seen cargoes offered well below levels seen in March.

The key Dubai M1/M3 (May22/Jul22), which is closely monitored by Middle East National Oil Companies for setting OSP differentials, retreated more than $1/b Thursday to a two-month low of $2.94/b, having traded above $7.50/b as recently as March 25.

The same Brent spread has also retreated from around $7/b on March 25 to under $2/b Thursday, again indicating the continued flow of Russian barrels plus planned US/IEA stock releases having a significant impact in flattening the forward curve.

"The announced (US) release of 180 million barrels will be spread over the next six months. This has delivered an expected change in the Brent futures curve, by shifting prices down in the short term while pushing them upwards again by comparable amounts for contracts expiring later in the year," said Claudio Galimberti, senior vice president of analysis at Rystad Energy.