September 4, 2018 / 4:22 PM / 21 days ago

After summer of discontent, Brent oil investors turn optimistic

LONDON (Reuters) - Brent futures show investors are more optimistic that demand for oil will outpace supply than they have been in six weeks, ahead of the potential loss of Iranian crude due to U.S. sanctions and because of a spike in unplanned production outages.

A pump jack operates at sunset in an oil field in Midland, Texas U.S. August 22, 2018. Picture taken August 22, 2018. REUTERS/Nick Oxford

The price of the front-month November contract LCOc1 has overtaken that of second-month December futures LCOc2 for the first time since mid-July, excluding expiry dates, to stand at a premium of around 30 cents a barrel.

Such a structure in the futures market is known as backwardation, the opposite of contango, which is when front-month contracts trade at a discount to longer-dated ones.

The premium of the November contract over those with later maturity dates means it is now uneconomical to store oil for any length of time. But it is profitable to maintain a bullish position in the futures market, as investors earn an automatic premium when they sell the pricier near-term contract at expiry and buy a longer-dated one.

As a result, positioning data from the InterContinental Exchange shows that in the latest week fund managers increased by the largest amount since late 2016 their bets that the price of Brent crude futures will rise. [O/ICE] 3ICELCOMNET

GRAPHIC: Investors flock to Brent crude futures as supply starts to tighten - reut.rs/2PF63bJ

Money managers hold nearly 390 million barrels’ worth of bullish positions in the Brent market, although this is down from April’s record 632 million barrels.

The Atlantic Basin physical market is still under pressure from an overhang of unsold barrels, although this excess has shrunk to around a third of the more than 20 million barrels that was stored on ships as little as two weeks ago.

“The return to backwardation can also be underpinned fundamentally with our crude balances hinting at a very tight remainder of the year much in line with last year’s levels,” consultancy JBC Energy said in a daily note.

“With ship-tracking data now pointing at a reduction in Iranian exports, renewed strife in Libya, and Venezuelan export availability hobbled by an accident at the key Jose terminal, the list of bullish headlines is getting longer ... the fact that physical Brent is still in contango, however, is the last big fly in an otherwise bullish ointment.”

Reporting by Amanda Cooper; Editing by Kirsten Donovan

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