Brent forward contracts are under pressure due to an oil oversupply, causing a drop in backwardation seen a month ago. Recently, the market shifted to contango, where the 6-month contract traded higher than the front month. However, with recent oil price hikes, backwardation has strengthened again, and the next Brent forward contract is now $2 above the 6-month contract. This shift is partly due to potential oil supply cuts from Russia in response to US sanctions. In the gasoil market, backwardation has also lessened but has not switched to contango. Constraints on Russian diesel supply have created a shortage in Europe, partly due to Ukrainian drone strikes on Russian refineries, which have reduced diesel production. The International Energy Agency (IEA) reported that Russian gasoil exports fell from 800,000 barrels in August to 720,000 in September. By September 2024, this number rebounded to 840,000 barrels. A ban for resellers starting October 1 has tightened supply further, raising gasoil prices to over $700 per ton, and the gasoil crack spread has widened to $27 per barrel. The FXStreet Insights Team offers market observations and expert insights on these developments.

Brent Forward Curve

The Brent forward curve is steepening into backwardation again, similar to last year. The front-month contract now has a premium of nearly $3 over the six-month contract, even wider than the $2 spread seen in late 2024. This indicates strong market concern about immediate supply availability. This situation arises from renewed fears about Russian oil supplies following recent US sanctions. Russian seaborne crude exports have dipped below 3 million barrels per day recently, down from stable levels of over 3.4 million barrels per day earlier this year. Traders may find that holding long positions in near-term Brent futures could be profitable as these supply risks continue. The refined products market, especially for gasoil, is showing similar tightness as in 2024. The diesel market is showing impressive strength, suggesting this isn’t just a crude oil issue. Traders should consider opportunities beyond the main Brent contract.

Ukrainian Drone Attacks

Recent Ukrainian drone attacks on Russian refineries have further reduced diesel output and worsened the situation. This has pushed the gasoil crack spread above $30 per barrel, up from $27 a year ago. Bullish positions in the gasoil/diesel market, favoring gasoil over crude, appear to be well-supported by market fundamentals. Given these factors, traders might consider derivative strategies that capitalize on volatility and price increases. Purchasing call options on near-term Brent or gasoil contracts could offer potential gains while limiting risks. The market is factoring in a supply risk premium, and any escalation could widen these spreads even further. Create your live VT Markets account and start trading now.

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