Oil traders just provided another sign that the market is rebalancing.
The WTI calendar spread for the next six months moved from “contango” into “backwardation” Tuesday. To explain, a calendar spread measures the difference in price between any pair of oil contracts with different delivery dates and can explain the current supply-demand balance in the market.
These oil futures contracts are financial instruments that carry legally binding obligations — so a buyer and a seller have the obligation to take or make delivery of an underlying instrument, such as oil, at a specified settlement date in the future.
In this particular case, the spread or measure is of the next month’s oil contract against another in seven months from now. This is otherwise known as the 6-month spread, and currently underscores a growing level of immediate demand for WTI crude as inventories shrink.
According to Reuters data, it is the first time this measure has slipped into “backwardation” since November 20, 2014.
Backwardation is when the current price of oil is higher than a future cost of oil. It is seen as a sign of higher immediate demand. Conversely, contango is when the futures price of oil is higher than the spot delivery price.
As the chart below indicates, WTI has just moved into backwardation, while Brent crude — on the same 6-month spread basis — moved into backwardation earlier this year.
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