US oil prices shot up to a 12-week high on Tuesday in a second day of frenetic spread trading, with dealers racing to claw back a record discount versus Europe's Brent as they gave in to evidence of tightening supplies.
While signs of eurozone discord hit Brent and other risk markets ahead of Wednesday's pivotal European Union leaders meeting, many traders focused more on the twist in the US market's structure and the collapse in the Brent/WTI spread, which has sunk more than $6 in three days to its narrowest since July.
The market's shift continued to deepen into a structure known as backwardation, where prompt futures are costlier than forward prices. The spread between December 2011 and December 2012 futures surged from minus $1.65 a barrel on Friday to $2.76 on Tuesday, an unprecedented inversion that signals a key shift in mind-set toward a much tighter near-term market.
The collapse in the Brent/WTI spread and abrupt reversal from contango - which had prevailed since the 2008 financial crisis - appeared to lack any single trigger, instead stemming from traders' capitulation to weeks of growing signs that US Midwest oil supplies were tightening. While some analysts had said for some time that the market appeared to be overlooking tightening fundamentals, the violence of this week's trade caught many off guard.
"The market had gotten secure in the notion that there is and there would be more than ample supplies of crude in and around Cushing, but the fact of the matter is that the supplies of crude deliverable against the NYMEX futures contracts are limited and falling rather than excessive and rising," commodities investor Dennis Gartman said in a daily note.
In London, Brent crude futures for December delivery settled 53 cents lower at $110.92 a barrel. It had fallen earlier after a report that EU finance ministers had cancelled a meeting, although a summit of leaders will still take place on Wednesday. It hit a of $112.15 early. US crude for December delivery settled at $93.17 a barrel, rising $1.90, the highest close since August 2. In early trade, it jumped more than $4 briefly to hit an intraday high of $94.65, the loftiest intraday price since August 2.
US crude came off session highs after a report showed that US consumer confidence dropped in October unexpectedly to its lowest in 2-1/2 years. That stoked worries about US oil demand, analysts said. "US consumer confidence disappointed," said Tim Evans, energy analyst at Citi Futures Perspective in New York.
Trading volume in the US market was 41.3 percent above the 30-day average, though the flurry of short-covering and trend-following activity that had driven Monday's volume to the highest since February had subsided slightly. Volume on Brent crude was 0.5 percent above its 30-day average.
The discount on US crude against Brent narrowed to as little as $16.01 a barrel, the tightest since early July. As Brent pared losses, its premium to US crude edged up to $17.75 at the close. "The US crude price is responding to a swift reduction in US crude oil stocks in (the) past few weeks, which have plunged by over 10 percent since the end of May. The previous substantial inventory overhang has now been fully depleted," said Carsten Fritsch, a commodity analyst at Commerzbank in Frankfurt. "Stocks at Cushing are 25 percent below the record level of the spring," he added.
A Reuters poll of 35 analysts showed Brent crude averaging $106.80 per barrel next year and $108.60 in 2013 as demand for fuel from China and emerging economies keeps the global oil market tight. US crude is forecast to average $92.00 a barrel in 2012 and $99.50 in 2013.
The market was closely watching US supplies for direction as weekly inventory data from the American Petroleum Institute (API) and the US Energy Information Administration (EIA) will be released on Tuesday and Wednesday, respectively. Analysts forecast an increase of 1.3 million barrels in US crude inventories, with refined products falling.