Dubai crude futures spreads flip to mild backwardation despite gloomy outlook

Benchmark Dubai crude futures spreads flipped from contango into muted backwardation during mid-morning trade in Asia Monday, the first trading day of March, despite bearish macroeconomic factors related to the spread of the coronavirus continuing to dominate markets.

At 11 am in Singapore (0300 GMT) Monday, the new prompt April/May intermonth spread for Dubai crude futures was pegged at 3 cents/b. This spread was last assessed at minus 9 cents/b at the 0830 GMT close in Asia on Friday, the last trading day for February.

Further down the Dubai futures curve, the May/June spread also flipped into backwardation after several days in contango. It was pegged at 6 cents/b Monday morning, up from minus 2 cents/b assessed Friday.

Dubai spreads flipping into backwardation could be a temporary move as investors consolidate positions in step with contracts rolling over to the new trading month, market participants in Asia said. A sudden shift in market sentiment was unlikely, given there was no turnaround in underlying fundamentals regarding softer oil demand due to the spread of the coronavirus outside of China, market participants in Asia said.

Globally, 84,161 cases of coronavirus had been confirmed in 59 countries as of Friday, according to University of Virginia data.

While the overall number of new cases continues to fall, the growth rate outside of China has accelerated, with major outbreaks emerging in South Korea, Italy, and Iran.

Outlook for oil demand in the second quarter was bearish, with rhetoric related to the upcoming OPEC+ meeting in Vienna later this week setting a challenging path for additional production cuts.

Russia, the key non-OPEC partner in the deal, is likely to put up some resistance to further cuts, with Saudi Arabia pushing the other end of the agenda.

The alliance is mulling whether to cut another 600,000 b/d of output due to the drop in oil demand from top oil importer China, where the coronavirus outbreak has crimped economic growth.

Meanwhile, the new prompt May Brent/Dubai Exchange Futures for Swaps spread was barely changed between Friday's close and Monday's intraday trading in Asia. The May EFS was pegged at $1/b at 11 am in Singapore Monday, narrowing marginally from Friday's assessment of $1.02/b.

Within Asia, market activity will now move to May-loading cargoes of Middle East crudes, but trading itself will kick off later in the month. Producers in the Persian Gulf are expected to announce official selling prices this week, following which refiners will evaluate their requirements. Trading will commence once refinery buying requirements for the month are finalized.