Oil trades near 25-month high; Brent in backwardation

Oil trades near 25-month high; Brent in backwardation

Singapore: Oil was steady near 25-month highs on Friday following a slew of upbeat US economic data that boded well for demand from the world’s top user, ahead of a jobs report expected to show employment expanded for a second straight month in November.

US crude for January fell 2 cents to $87.98 a barrel at 12:36pm, still headed for a second straight weekly gain, after ending at $88 on Thursday, the highest settlement since October 2008. Prices touched $88.63 on 11 November, the highest intraday price in 25 months.

Jobs, home sales and retail sales data from the US on Thursday pointed to a sustainted economic recovery, while statistics earlier this week showed factory activity in China, the world’s second-largest oil user, reached a seven-month high.

Although the European Central Bank resisted pressure on Thursday to commit to a major bond-buying program to contain the euro zone debt crisis, traders said the ECB had been quietly buying bonds anyway, boosting the euro and raising the appeal of riskier assets, including commodities.

“Oil, like most global markets, has been buffeted by concerns surrounding the euro zone problems and their potential broader implications," JP Morgan analysts headed by Lawrence Eagles said.

“While financial risks remain, we feel that the increasing synchronicity of global economic growth provides a resurgent force to physical commodity demand."

Rising oil demand from emerging and developed economies is also changing the price structure of crude futures markets. ICE Brent contracts for earliest delivery or settlement are now trading at a premium to later contracts for the first time since 2008, according to Barclays Capital.

ICE Brent for January gained 6 cents to $90.75 by 08:20 am, after touching $90.84 on Thursday, the highest price in 26 months. The February contract was up 7 cents at $90.72.

This pricing structure, known as backwardation, is replacing the prevalent so-called contango of the past two years, where earlier contracts traded at a discount to future ones. Contangos are reflective of oversupplied markets, while the turn to backwardation signals a tightening balance.

“The combination of the effect of falling prompt inventory at the front of the curve and a healthy degree of producers selling along the curve has helped to pivot the (Brent) curve back towards flat," Barclays Capital analysts headed by Paul Horsnell said in a weekly report.

US nonfarm payrolls likely increased last month by 140,000, according to a Reuters poll, amid strong gains in private hiring reported on Wednesday. The report is due at 06:00 pm.

Fresh signs the US economy has broken out of its summer soft patch emerged on Thursday as data showed a gauge of jobless benefits hit a new two-year low last week and pending home sales unexpectedly rose in October.

The picture also brightened as retailers recorded their best sales gains in four years in November, with shoppers drawn in by deals throughout a month that culminated with a surge in “Black Friday" traffic.

Both US heating oil and gasoline futures rallied on Thursday, supporting crude’s rise. Heating oil rose amid colder temperatures in the US Northeast, the biggest heating oil market. Gasoline gained on regional supply tightness in the key East Coast market.

Household, government spending and exports drove euro zone economic growth in the July- September period, official data showed on Thursday.

In other markets, Japan’s Nikkei share average rose 0.8 percent to a six-month high on Friday, after the stream of positive US retail and housing data raised hopes for a swift recovery.

The euro retained its momentum on Friday, keeping gains made after talk the ECB aggressively bought euro zone periphery debt.