New | Oil price rout may be over as forward curve flattens

The US oil market has firmed up into its best shape this year, as ebbing fears of an inventory overflow and renewed hedging in far-distance futures flattens the forward curve - another possible sign that a months-long rout is really over.

On Wednesday, the discount for June US crude oil futures on the New York Mercantile Exchange versus December jumped 47 cents to settle at US$3.21 a barrel, the tightest spread in nearly five months and less than half what it was a month ago. The discount of December 2015 to December 2016 tightened by 58 cents to settle at $2.73 a barrel, its smallest since November.

The narrowing spreads will likely be a welcome sign for oil bulls and members of the Organization of Petroleum Exporting Countries (OPEC), who often look at the shape of the curve as a clearer indication of fundamentals. US crude prices also rose on Wednesday, closing at their highest this year.

But it will be a disappointment for some traders who were hoping to stockpile more crude and cash in on a deep "contango", where spot are at a discount in relation to future prices.

The trigger for the latest jump was data showing the US nationwide crude oil stockpiles rose by only 1.3 million barrels last week, the smallest build this year. But oil traders see two other less obvious factors at play.

For one, there’s a growing sense that oil storage capacity in Cushing, Oklahoma, is unlikely to run out any time soon. Stocks have risen for the past 19 weeks, doubling to a record 61.5 million barrels as of last week, but the rate of increase has slowed and available capacity appears to be higher than the 55 million to 60 million barrels most people initially estimated.