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Dated Brent contract for differences (CFD) short-term backwardation steepens despite weak crude oil demand

London — The upward kink in the Dated Brent contract for differences curve has grown more pronounced in the last week around the August 27-31 CFD week, despite limited reports from market sources of stronger demand emerging in the North Sea crude market.

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The relative strength in the August 27-31 CFD week has created a backwardated structure across to the subsequent September 3-7 CFD week, rising to as much as 25 cents/b Tuesday, while the rest of the CFD curve holds in contango.

This steep backwardation compares to the less pronounced 8 cents/b backwardation over the same CFD weeks seen only last Friday.

The high offers and the lack of liquidity on the respective CFD roll was attributed to this spike in the CFD structure, with some trading sources adding that the localized strength in this paper market contrasts with the weak physical market fundamentals, which is expected to continue as trade flow from the US ramps up in September around the US refinery turnaround season.

The BFOE grades have been well offered of late during the Platts Market on Close process, seeing as many as six ship-to-ship (STS) offers in one trading session on Monday.

Pockets of strength around weekly contracts is not unusual, one trader said, as demand can increase around arbitrage fixtures heading east or an increase in regional demand, similar to a previous episode that saw the backwardation reach an unprecedented 55 cents/b over July loading dates.

In the latest fixtures, the VLCC New Merit has been fixed to load Forties over September 4-6 for delivery options in South Korea, according to shipping sources.

While the August 27-31 to September 3-7 CFD backwardation was pegged as high as 30 cents/b, according to broker reports during the Wednesday morning trading session, one trading source expected this to come off, adding that he would be happy to sell into that CFD roll at a 28 cents/b backwardation.

This localized recent strength and backwardation also contrasts with the contango market demonstrated across the broader Brent markets, including the Cash BFOE contracts and ICE Brent futures.

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

--Peter Farrell, peter.farrell@spglobal.com

--Edited by Alisdair Bowles, alisdair.bowles@spglobal.com