ANALYSIS: Open interest for ICE June Dubai crude futures steadies amid easing contango

Singapore — Hedging activity in the Middle East crude paper markets has started to plateau as supply cuts and rising prices combined to weaken the case for putting more crude barrels into storage in the coming months, data analysis of Dubai derivative positions showed in the week ended June 6.

Combined open interest for June Dubai crude futures on the Intercontinental Exchange was relatively stable on the month, edging up just 0.4% from end-April to 104.365 million barrels as of May 29, data from the exchange showed.

The month-on-month stability was likely an after-effect of an initial rush to hedge crude in storage over March and April, when oil markets fell deep into contango, said crude traders.

"With the massive contango coming into the market, and terrible market conditions, Dubai spreads would have been used to lock in some of the floating storage for Dubai-linked crudes," said a Singapore-based crude trader.

A contango market structure -- where prompt crude is priced lower than crude to be sold at a future date -- depicts lower prompt demand for cargoes, and favors putting crude in storage to be sold in the coming months at a higher price.

"Refiners would have also had to unwind or build inventory positions dependent on their positions and Dubai derivatives would be used for this," the trader added.

Indeed, the Dubai-linked physical crude market in Asia fell to precipitous lows in April, with the contango for the Dubai cash/futures spread averaging minus $9.15/b over the month, Platts data showed.

Contango eases

By end-May, however, the contango had eased considerably, and the same spread averaged minus $2.73/b over May. A milder contango would suggest an equivalent contraction in storage and hedging activity, traders said.

Open interest for the Dated Brent versus Dubai first-line futures contract fell 44% on the month to 6.600 million barrels during the same period, the data showed.

Meanwhile, trading volumes for Dubai crude futures fell 32% on the month to 583,094 lots in May, ICE data showed.

The decline was led by the drop in Dubai first-line trading volumes, which are seen 32% lower on the month at a total of 438,339 lots in May, the data showed. The volume had trended lower from April after hitting a record high in March.

Similarly, on the Dubai Mercantile Exchange, open interest in Dubai and Brent-Dubai futures contracts declined by end-May as compared to end-April, data from the DME website showed on June 5.

Total open interest for Dubai futures contracts stood at 6.1 million barrels as of May 29, down 34.1% from 9.25 million barrels in end-April. For Brent/Dubai derivatives, this figure stood at 8.07 million barrels on May 29, a decline of 12.1% from April 30.

The easing contango, alongside an uptick in demand and production cuts from OPEC+ are all factors that would have decelerated the amount of crude being sent into storage, said market participants. As a result, storage-linked hedging for Dubai paper contracts would have been reduced, although not entirely erased.

Open interest for June first-line Dubai crude futures rose 7% on the month to 59.045 million barrels as of end-May, while June Brent first-line versus Dubai first-line contract open interest rose 2% to 38.720 million barrels.

Oman demand uptick

On the DME, open interest for Oman futures contracts rose 13.3% month on month, to 14.365 million barrels as of May 29, the DME data showed. The uptick in Oman futures hedging activity in the face of declining positions for other crude contracts was likely a result of concentrated demand from China for the medium sour grade, said traders.

Nearly 80%-90% of exported Oman crude flows into China each month.

As the coronavirus pandemic caused widescale contraction in crude oil demand across Asia, buying activity increased in China due to attractive domestic floor pricing for crude, market participants pointed out.

Meanwhile, trading activity at the beginning of June has stalled, said crude market participants in Asia, while OPEC+ members hash out an extension to production cuts over July.

Members in the alliance, led by Saudi Arabia as the main proponent, have called for extending the organization's historic 9.7 million b/d cuts beyond May and June into July, instead of reducing the quantity as previously agreed in April.

OPEC and its allies will meet June 6 via a webinar to finalize the terms of extending a 9.7 million b/d production cut, after hashing out quota compliance issues within the alliance for the better part of the week.