Supply From the North Sea Helps to Ease Hoarding of Brent, Spread Between Brent and WTI Relax

“The incentive for investors to buy and hold Brent crude has dwindled to its weakest level in eight months as supplies from the North Sea recover.

The premium for immediate supplies of Brent crude versus later deliveries shrank to 28 cents a barrel on March 13, the least since July, as production headed for the highest in 10 months. The narrowing spread is dimming the attraction of buying front-month futures and then transferring, or rolling, the position into the next contract at each monthly expiry. Brent traded as high as $109.55 a barrel in London today.

“The Brent structure has been weakening,” Olivier Jakob, managing director at consultant Petromatrix GmbH in Zug,Switzerland, said by phone on March 13. “And if Brent cannot sustain a high enough roll return, then investors will be more hesitant to hold it at these kinds of price levels.”

Futures have dropped 8 percent from this year’s peak of $119.17 as Europe’s debt crisis and the resumption of North Sea output prompted money managers to cut bullish bets by the most in 18 months. Returns are falling just as the price difference between Brent and West Texas Intermediate, the U.S. benchmark oil, shrinks to its narrowest since Jan. 18.

Roll Yield

Excluding gains or losses from changes in the price of the underlying security, an investor could have made almost $12,000 by buying and rolling a 1,000-barrel lot of Brent, according to data compiled by Bloomberg. The same strategy returned $17,000 per contract in 2011.18

Buying WTI, for which immediate supplies are cheaper than later deliveries, and rolling it through 2012 would have lost $3,150 per contract….”

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