Oil declines as key trader gauges point to market weakness

Oil extended losses Tuesday as key measures of the Brent market flashed signs of weakness.

Brent futures slipped below $83 a barrel, trading at their lowest this week, while West Texas Intermediate edged lower toward $78. Backwardation in Brent’s front two contracts was as narrow as 10 cents a barrel — that’s the smallest gap since January, a signal of strengthening supply relative to demand.

Brent futures are about 7% higher this year, supported by OPEC+ cuts, although prices have eased since mid-April. Traders are turning their attention to the producer group’s meeting in early June, where a rollover of existing curbs is expected. Meanwhile, geopolitical tensions continue, with ongoing drone strikes on Russian oil refineries and another Houthi attack against a tanker in the Red Sea area over the weekend.

There is “too much supply looking for a home, something that is on clear display through the continued weakness in timespreads,” said Ole Hansen, head of commodities strategy at Saxo Bank. The narrower prompt spread on Brent will add pressure on OPEC+ to extend cuts, he said.

Along with the weaker backwardation, the Brent DFL — a measure of Dated Brent relative to Brent futures — has turned negative, a sign of weakness in the physical oil market. Brent is expected to average $84 for the rest of the year and WTI $79.50, according to RBC Capital Markets LLC.

In the wake of intense geopolitical events, there are few bullish signals, said Bjarne Schieldrop, chief commodities analyst at SEB AB. Refining margins in Amsterdam-Rotterdam-Antwerp, Europe’s oil trading hub, have weakened, although they still look better than normal, he added.

Meanwhile, data last week showed money managers cut their net long positions on Brent to the lowest since January, although they increased those for WTI.

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