US crude narrows discount to Brent
By Kevin Morrison
Published: May 6 2005 11:47 | Last updated: May 6 2005 22:19
Oil well
US crude narrowed the discount to its European counterpart, Brent futures, this week on signs of further buying, particularly when prices dipped briefly below $50 a barrel.
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West Texas Intermediate futures for June delivery rose $1.24, or about 2.5 per cent, over the week on the New York Mercantile Exchange to $50.96 a barrel in New York trade.
IPE Brent for June delivery was almost level over the week, which masks the volatility during the week following the inventory data that showed US crude stockpiles at their highest level in six years.
IPE Brent fell 36 cents to $50.77 a barrel on Friday.
In spite of oil showing a reluctance to fall below $50, analysts are concerned that the price is set for a correction over the summer.
Deutsche Bank said in a note that the discount of the front-month contract, June WTI, to WTI contracts deliverable later in the year had encouraged a strong increase in stockpiles, about 40m barrels since last October.
“The potential oversupply in the crude oil market is consequently escalating downside price risks as well as contributing to a negative roll return,” the bank said.
The negative roll return relates to the rollover by investors of their crude futures contracts from the front month when it expires to the successive front month contract.
With current front-month contracts trading at a discount, investors have to pay higher prices to roll over their exposure to crude futures. This in turn creates a negative monthly return for investors.
This discount pricing structure started to emerge at the end of last year and became more prominent this year.
Deutsche Bank said that, between 1989 and 2004, the WTI roll return had averaged a gain of 9 per cent each year. So far this year, the roll return has turned negative and is down by 6 per cent.
In metals, nickel is showing tight supply and demand conditions, with inventories falling this week to their lowest since 1991 of about 5,600 tonnes on the London Metal Exchange. About half of the stockpiles in LME warehouses are already allocated to customers.
Norilsk Nickel, the world’s largest producer, said it had no surplus to sell. The tight market is reflected in customers paying premiums of $800 a tonne for nickel in the spot market, compared with the three-month benchmark price of $15,950 a tonne.
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