(John Kemp is a Reuters market analyst. The views expressed are
* Chart 1: tmsnrt.rs/2lP8pbF
* Chart 2: tmsnrt.rs/2lP0w5W
* Chart 3: tmsnrt.rs/2mzz22Q
* Chart 4: tmsnrt.rs/2m2bbe9
By John Kemp
LONDON, Feb 28 Brent spreads have weakened
sharply in recent days as traders become less convinced the oil
market will rebalance early in the second quarter.
The calendar spread from May to June has eased from 6 cents
contango per barrel on Feb. 21 to 30 cents contango on Feb. 27
Calendar spreads track the balance between crude supply,
consumption and stockpiles, with contango indicating a market in
balance or oversupply, while backwardation is associated with a
fall in stocks.
Most traders and forecasters expect the oil market to shift
from a supply surplus in 2014/15 to a deficit in 2017/18 with a
corresponding shift from contango to backwardation.
But the timing and profile of the transition is subject to
considerable uncertainty and has become one of the most popular
plays for hedge funds and other traders.
Spreads for the first few months of 2017 rallied
consistently and sharply since the middle of January before
backing off in recent days.
The rally and subsequent reversal has been concentrated in
the second quarter while spreads for the third and fourth
quarter have been much more stable (tmsnrt.rs/2lP0w5W).
The rally and reversal were most pronounced in Brent though
a similar pattern has been visible in spreads for WTI (tmsnrt.rs/2mzz22Q).
Hedge funds accumulated a large net long position in WTI
spreads following the announcement of production cuts by OPEC
and non-OPEC countries in November and December 2016.
But the net long position has fallen from a recent peak of
160 million barrels in mid-January to 127 million barrels on
The net position declined by 18 million barrels in the most
recent week alone and is back to levels last recorded in
Hedge funds and other traders bet the market would rebalance
even faster than expected with a large draw down in stockpiles
between April and June.
But in recent days that confidence has evaporated and the
market is back to anticipating the draw down will start in
earnest in the third quarter.
Crude traders moved too early and aggressively in pricing in
a tighter market and a big draw down in stockpiles and now they
have backed off, at least for the time being.
* "Oil volatility migrates from flat prices to spreads",
Reuters, Feb. 24
* "Brent market tightens sharply as traders eye stock draws,
possible squeeze", Reuters, Feb. 21
(Editing by David Evans)