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Dated Brent crude oil points to prompt strength while futures contango widens

London — Strength in Dated Brent crude oil on the back of a surge in bidding interest for all BFOE grades except Troll Monday demonstrated a build in demand over prompt weeks, while in the paper markets ICE Brent futures reached its widest contango in 11 months amid global oversupply concerns.

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"The bidding on the physical seems very specific over this week and next...it's just this prompt stuff," one North Sea paper trader said Monday.

Dated Brent rose 37 cents/b Monday to $73.615/b, with all five grades showing sharp increases from Friday.

This rally in Dated Brent coincided with the strike action at Total's North Sea platforms that could disrupt production across the region, including at the Forties Pipeline system, the largest grade in the BFOE crude basket.

However, in the paper market, the ICE Brent futures September/October contango widened to 32 cents/b Monday, the widest contango since August 31 last year when it was at a 48 cents/b contango, amid concerns over oversupply in global crude markets, particularly in light of recent reports on record level US production, which topped 11 million barrels in the latest weekly data from the Energy Information Agency.

Pressure on futures has also filtered through into wider crude swaps markets including Dated to Frontline instruments.

The August DFL contract was last assessed at minus 73 cents/b Monday, down 5 cents/b on Friday, and traded as low as minus 90 cents/b Tuesday.

In other paper markets, the Contract for Difference curve also demonstrated tightness in prompt weeks in the physical market, but the contango also widened over the back end of the curve along with the Brent futures structure.

A steep backwardation was maintained across the July 30-August 3 CFD week through to CFD week August 6-10, last heard in the brokered market at a 40 cents/b backwardation.

However, further along the CFD curve, the flat structure across the August 6-10 CFD and August 13-17 CFD weeks moved into a slight contango of 9 cents/b, according to one broker report Tuesday morning.

"Both a weaker DFL and CFD rolls are helping," a trader said, adding that the recent sell-off in the Brent futures market was, for some traders, improving the arbitrage economics of sending oil to the East.

However, for others, recent volatility in the crude futures market had made it difficult for market participants to scout profitable strategies and hold on to their views amid price turbulence.

The prompt futures had only been in a contango structure for the last five trading days, and uncertainty remained among traders as to how long this contango would be maintained.

"Everyone is scared. The US arbitrage is open and everyone that was long got killed," a third trader said.

--Ahila Karan, ahila.karan@spglobal.com

--Anthony Guida, anthony.guida@spglobal.com

--Edited by Jonathan Loades-Carter, jonathan.carter@spglobal.com