London, 23 July (Argus) — Tight supply in the North Sea has helped invert the front of the forward curve, with prompt prices above forward for the first time in over two years. The global recession reduced demand, leaving the market oversupplied and in contango — with prompt crude at a discount to supply further forward. Fluctuations in the depth of the contango have followed a concertina pattern, in which tightening spreads create an incentive for selling excess stocks, and then widening spreads encourage accumulation. The concertina may have played its last note, as the market returns towards a state of balance.

Ice front-month Brent futures expired on 15 July at a premium to the second-month settlement on that day, for the first time since March 2008. The corresponding front-month 21-day North Sea forward contract settled at a premium to the second month in July for the first time since the end of May 2008.

Key North Sea grade Forties, which usually sets the North Sea Dated benchmark, is likely to be in short supply until mid-August, owing to a broken valve at the Unity Riser platform, through which two-thirds of the blend passes. The platform is scheduled for maintenance in the first week of August. It will remain partly operational, but two cargoes scheduled for July have been cancelled and nine cargoes in the August programme — which has already been cut by scheduled maintenance — have now been deferred by up to three days.

At the same time as supply is affected by maintenance, refiner demand for crude is likely to be higher as throughputs in Europe increase from recessionary lows. The market is better supplied in the second half of August, as reflected in the contracts for difference (CFD) market, which is in backwardation to mid-August and contango thereafter.

The contango along the WTI curve is tightening at the same time, suggesting that the cause is wider than local factors such as field maintenance. The discount of Nymex front-month WTI to the fourth month was less than $1/bl on 20 July, for the first time since October 2008. The WTI curve has not been in backwardation since the market turmoil of September-October 2008 dragged forward prices lower more quickly than prompt. But the prevailing contango is under threat, as US crude stocks fell towards five-year averages in late June and early July, and as Opec output dipped in June. But onshore and offshore stocks remain above historical averages, preventing a rapid switch to backwardation.

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