U.S. Oil's Four-Week Winning Run Is Hiding Signs of Weakness

(Bloomberg) -- While U.S. oil has been swept up in a global rally for the past four weeks on growing fears of a supply crunch, a closer look at the futures market signals American crude is weakening.

West Texas Intermediate futures in New York are set for a fourth weekly gain -- the longest winning streak since January -- yet they’re trading near the biggest discount in almost four months to global benchmark Brent crude in London. Moreover, the premium of near-term WTI contracts over those for later has slid to the least since June -- indicating that a bullish market structure known as backwardation is fading.

U.S. Oil's Four-Week Winning Run Is Hiding Signs of Weakness

While that may seem counter-intuitive at a time when concern is growing that higher Saudi and Russian output could reduce global emergency supplies, impending U.S. sanctions are taking out Iranian crude off the market and President Donald Trump is demanding lower prices, the futures are simply reflecting some situations specific to the American market.

U.S. output is booming -- the nation is now among the top-three oil producers in the world -- especially at inland shale fields. Yet, a pipeline bottleneck means not all of those supplies can be brought to the Gulf Coast, the location for most refineries and export terminals. Instead, they are getting stuck at the storage hub in Cushing, Oklahoma, where stockpiles last week rose by the most since March. Nationwide inventories also jumped the most since March 2017.

Those swelling supplies are weighing on front-month futures of WTI, which were just 8 cents a barrel higher than the second-month contract at the close on Thursday. That compares with a premium of $2.55 in early July, which was the biggest since 2014.

U.S. Oil's Four-Week Winning Run Is Hiding Signs of Weakness

Meanwhile, in Oklahoma, decreased activity was said to have been observed at a refinery that runs Cushing crude since Wednesday, meaning supplies may likely pile up further at the storage hub. Stockpiles at Cushing may grow to 70 million barrels by April from the current 20-million-barrel level, according to Citigroup Inc.

Brent, the benchmark for more than half of the world’s crude, is seen better supported as concerns linger that higher output from the Organization of Petroleum Exporting Countries and its allies won’t be enough to offset global supply losses. Major trading houses such as Trafigura Group and Mercuria Energy Group have heralded the return of crude to $100 a barrel.

Brent for December settlement traded 38 cents higher at $84.96 a barrel in London at 10:43 a.m. in London, with front-month futures poised for a fourth weekly increase, while WTI for November were up 51 cents at $74.84 a barrel in New York.

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