The Brent futures market was taut in anticipation and volatility last week as the leak of intelligence about the, at the time, looming Israeli strike on Iran meant that the waiting game would have to continue, and there were fewer clues. The front spreads have been rangebound over the fortnight, and the DFL market has superseded this, allowing for the Dated-to-Lead (DFL vs Brent spreads) structure to swing up. The question for spreads is whether they see the support from the Dated structure ripple through the DTL reverting, or whether the anticipated heavy pressure in the futures structure will strike through the structural integrity of the curve. The physical differential dropped to around 5c on 17 Oct and has gently been implied higher since.
The physical crude has been supported, and the diff has been implied higher every day in the past 2 weeks to around 26c on 28 Oct Looking at the implied diff on the forward curve, this is around 50c for next week. This shows there is expected strength in the market, and the phys is implied to rally on this. 28 Oct saw some offering from majors and a trade house offering Midland but the diff was supported from Gunvor bidding Forties at the back of the curve. Looking to the States, a more robust freight structure has helped Midland to be paid at a premium, although lower freight and some glimmers of US selling have pointed to some more Midland coming to Europe.
In the paper, the 04-08 Nov and 11-15 Nov CFDs have been really well bid, with strong buying from a London trade house. This has been a real support to the Dated structure and has helped the Nov/Dec DFL roll to 30c/bbl and the Nov/Dec Dated roll up to 60c/bbl.
From a risk/reward perspective, it feels quite hard to be bullish at these levels in the DFLs. The market is strong right now, but the question is whether it can maintain its strength and whether the physical diff can push it to the strongly implied curve.
