Oil traders are fleeing Brent crude at the fastest pace in eight years as signs of a glut undermined bets that the Islamist insurgency in Iraq would threaten supply.
The CHART OF THE DAY shows how the number of outstanding contracts in Brent crude collapsed in July as the forward curve on the ICE Futures Europe exchange moved into a structure called contango, where immediate prices are cheaper than later ones. The shift surprised traders, prompting them to close positions taken to benefit from an expected premium on immediate deliveries because of Iraq, according to Natixis SA.
“Positioning had built up quite heavily on the escalation in geopolitics, but then as the physical market softened, it was a rush to the exits,” Miswin Mahesh, an analyst at Barclays Plc in London, said by e-mail.
The move to contango may also hurt demand among financial investors as it removes the “roll yield” available when short-term prices trade at a premium, Mahesh says. This is the profit traders get when they can sell costlier immediate contracts and buy cheaper longer-dated ones. When the situation reverses into contango, investors pay a premium to switch from the immediate contracts. The effect of the diminished roll yield on an investment in Brent is reflected in the S&P GSCI Brent Crude Index, down about 5 percent since Brent’s shift into contango.
Open interest, or the number of outstanding positions that haven’t been closed, in Brent futures tumbled by 20 percent in July to 1.32 million contracts, the biggest plunge since July 2006, exchange data show. The decline was more than double that of West Texas Intermediate, the benchmark U.S. grade. Iraq’s exports rose last month, the nation’s oil ministry said Aug. 4.
Output from Libya, holder of Africa’s biggest reserves, is about 450,000 barrels a day, more than double the rate in April, according to government figures and data compiled by Bloomberg.
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