Oil prices fell, with ICE Brent down 0.9%, amid concerns about potential tariffs. There are worries about a market surplus later this year, adding to market troubles. While forecasts indicate a surplus in Q4 2025, the ICE Brent forward curve suggests otherwise. It previously showed backwardation until November 2025, followed by contango, reflecting expectations of oversupply.

Forward Curve Developments

Right now, the curve shows backwardation into early next year, flatness for most of 2026, and shallow contango by 2027. The spread from Dec-25 to Dec-26 shifted from a contango of over $1.80 per barrel in May to about $0.65 per barrel in backwardation now. Recent data from the American Petroleum Institute shows that US crude inventories dropped by 577,000 barrels, while stocks at Cushing increased by 314,000 barrels. Gasoline inventories decreased by 1.2 million barrels, but distillate stocks rose by 3.5 million barrels, which might help ease tight conditions for middle distillates. The Energy Information Administration will soon release its inventory report. Current market conditions highlight the need to keep an eye on oil inventory trends and forward curve changes. With recent price drops tied to tariff fears, we see demand destruction as a major risk. On June 12, the U.S. Federal Reserve suggested only one possible interest rate cut this year, pointing to slower economic activity. This economic pressure indicates that holding long positions on crude futures may be risky for now.

Opportunities in Calendar Spread Trades

A clear indicator is the structural change in the ICE Brent forward curve. The shift in the Dec-25 to Dec-26 spread from contango to backwardation shows that the physical market is tighter than overall sentiment indicates. This suggests possible opportunities in calendar spread trades that could benefit from short-term strength compared to longer-term contracts. The latest inventory data from the American Petroleum Institute presents a complicated picture that calls for caution. The decrease in gasoline inventories is a positive sign for the upcoming summer driving season, but the substantial increase of 3.5 million barrels in distillate stocks raises concerns. This could negatively impact refining margins, known as crack spreads, for diesel and heating oil. We must also keep in mind supply dynamics from the OPEC+ alliance. Their recent discussion of possibly unwinding production cuts starting in October supports surplus projections. Historically, following these plans can be inconsistent, and geopolitical events often disrupt expected supply changes. This creates a fundamental conflict between the current tight market and future supply promises, likely increasing volatility. Create your live VT Markets account and start trading now.

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