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Oil futures were higher Tuesday, on track for a fourth straight session climb, as a U.S. futures contract expiration, which roiled markets last month, comes back into focus at a time when the market appears to be demonstrating signs of better supply-demand alignment.
U.S. benchmark West Texas Intermediate crude-oil prices settled in backwardation on Monday, a condition in which the spot price and nearby futures are bid higher than contracts for later delivery. The June WTI Nymex contract, which is due to expire at the end of Tuesday’s trade, ended Monday above the soon-to-be front-month July contract.
That marks a shift from the contango trade, in which later dated futures are bid higher than nearby contracts, signaling a near-term supply glut and offering incentive to store a commodity for future use.
Futures prices traded in contango last month, when the May contract came off the board and settled at a negative price on April 20, a day ahead of its expiration. “There was limited refinery demand and clearly nowhere to put any purchased oil,” said Tyler Richey, co-editor at The Sevens Report, in a note Tusday.
The move into backwardation, however, “shows that there is both strong demand for physical crude…as well as available storage to take delivery,” he said.
In Tuesday dealings, June WTI crude CLM20, +2.45%, which expires at the end of the session, was trading 68 cents, or 2.1%, higher at $32.50 a barrel, after surging 8.1% on Monday.
The July WTI contract CLN20, +0.72%, which is the most-actively traded and is soon to be the front-month contract CL.1, +2.45%, was up 14 cents, or 0.4%, at $31.79 a barrel, following a 7.2% rally for the contract in the previous session.
Global benchmark Brent crude for July delivery BRN.1, +0.31% BRNN20, +0.31% rose a penny, or 0.03%, to $34.82 a barrel on ICE Futures Europe, after a 7.1% climb Monday.
“We find that this time around, trading has been a lot more cautious this month, making the prospect of sharp negative prices unlikely,” wrote Paola Rodriguez Masiu, senior oil markets analyst at Rystad Energy, in a Tuesday research note.
“There are two main forces behind a stronger oil price, the declining supply and the improving demand. Today the market sees both forces aligning,” he wrote.
An agreement between the Organization of the Petroleum Exporting Countries and their allies to cut some 9.7 million barrels a day in oil through the end of June have helped to stem a flood of crude against a backdrop of demand that had been declining, hurt by lockdowns implemented to stop the spread of COVID-19.
U.S. oil production has also fallen and there are signs of further declines ahead. Crude-oil production from seven major U.S. shale plays is forecast to decline by 197,000 barrels a day in June to 7.822 million barrels a day, according to a report from the Energy Information Administration released Monday.
Baker Hughes BKR, -1.69% on Friday reported a ninth straight weekly decrease in the number of active U.S. oil rigs.
Data on weekly U.S. petroleum supplies will be released late Tuesday by trade group the American Petroleum Institute and early Wednesday by the EIA.
Analysts polled by S&P Global Platts, on average, expect the EIA to report a climb of 2.4 million in crude supplies for the week ended May 15, along with a decline of 3.5 million barrels in gasoline inventories and an increase of 3.2 million barrels for distillate stocks.
In Monday dealings, June gasoline RBM20, +1.73% rose 1.1% to $1.0372 a gallon, while June heating oil HOM20, -1.67% fell by 2.1% to 98.49 cents a gallon.
June natural gas NGM20, +3.08% added 2.7% to $1.831 per million British thermal units.
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