- Brent crude's six-month spread falls into deeper contango
- OPEC+'s output hikes, cooling demand, weigh, analysts say
- Physical crude in North Sea, West Africa also weakens
LONDON, Oct 20 (Reuters) - Prompt Brent crude futures' discount to the six-month contract reached its deepest since December 2023 on Monday, reflecting a growing view that supply is ample as OPEC+ and other producers increase output.
Weakness was also being seen in physical crude oil markets in Europe and Africa, according to traders and LSEG data, as plentiful supply coincides with cooling seasonal demand heading into the northern hemisphere winter.
The first-month Brent contract traded as low as 56 cents a barrel below the contract for delivery in six months , having moved to a discount on October 16 for the first time since May.
A lower price for immediate supply than for later delivery - a market structure known as contango - typically indicates a perception that near-term supply is abundant and demand weakening.
MARKET WEAKENS ON SURPLUS
The equivalent spread for the major U.S. WTI crude futures contract was also trading in contango, having moved towards that structure last week.
OPEC+'s decisions to raise oil output more quickly and resilient production from the U.S. and other non-OPEC+ countries are the supply-side factors responsible for the weaker Brent and WTI structures, said Tamas Varga, analyst at brokerage PVM.
There is "more weakness to come as lots of oil at sea comes to ports", said Bjarne Schieldrop of SEB. "Mideast OPEC countries have boosted exports along with lower post-summer consumption."
Both futures contracts had spent much of the year in the opposite structure, called backwardation, where prompt prices trade at a premium to later supply. That reflects a perception of tight near-term supply and solid demand.
Brent's six-month spread was briefly in contango in May, after which it flipped and rose to nearly $7, the highest since October 2023, after Israel's attacks on Iran's nuclear facilities. Until last week it stayed in positive territory as risks to supply lent support.
A contango encourages traders to pay for storing oil so it can be sold at higher prices later.
PHYSICAL MARKET ALSO SHOWS WEAKNESS
The North Sea physical oil market, which underpins the Brent futures contract and the dated Brent physical benchmark used to price about two-thirds of the world's oil, is also weakening.
Short-term Brent swaps, called contracts for difference (CFDs), slipped into contango on Friday across the first three contract weeks in a sign of more abundant supply.
The price differential of North Sea Forties crude to dated Brent lost almost $1.30 per barrel last week and on Monday slipped to a 10-cent discount to dated Brent, according to LSEG data.
In the West African crude market, grades are struggling to clear because of weakening demand in Europe and Asia and stiff competition from rival Latin American crudes, traders told Reuters.
A total of around 21-35 Angolan and Nigerian cargoes remain unsold for November, with December loading programmes already starting to emerge, traders told Reuters.
West African grades typically trade a month further ahead than most others, making them a bellwether for traders of the future health of the physical market.
Reporting by Seher Dareen in London, editing by Alex Lawler, Jan Harvey and Tomasz Janowski
Source: Reuters