Oil prices decreased with ICE Brent closing 0.9% lower, amid looming tariff concerns. There are expectations of a market surplus later this year, which is contributing to market challenges.
While projections suggest a surplus in Q4 2025, the ICE Brent forward curve tells a different story. Previously, there was backwardation until November 2025 and contango thereafter, indicating a surplus expectation.
Forward Curve Developments
Currently, the curve shows backwardation into early next year, flatness through most of 2026, and a shallow contango by 2027. The Dec-25 to Dec-26 spread transitioned from a contango of over $1.80/bbl in May to around $0.65/bbl backwardation now.
Recent American Petroleum Institute data indicates US crude inventories dropped by 577k barrels, while Cushing stocks increased by 314k barrels. Gasoline inventories fell by 1.2 million barrels, while distillate stocks rose by 3.5 million barrels, potentially easing tight conditions in the middle distillate market.
The Energy Information Administration is set to release its inventory report soon. The current market conditions underscore the importance of monitoring oil inventory trends and forward curve developments.
Given the recent price decline driven by tariff worries, we see the market’s focus on demand destruction as a primary risk. Recent statements from the U.S. Federal Reserve on June 12th, signaling only one potential interest rate cut this year, reinforce expectations of slower economic activity. This macroeconomic pressure suggests that being aggressively long on crude futures is a risky proposition for now.
Opportunities in Calendar Spread Trades
We believe the most telling signal is the structural shift in the ICE Brent forward curve. The dramatic flip in the Dec-25 to Dec-26 spread from a deep contango to backwardation indicates the physical market is much tighter than headline sentiment suggests. This points toward potential opportunities in calendar spread trades, which could profit from this near-term strength relative to longer-dated contracts.
The latest inventory data from the American Petroleum Institute presents a complex picture that warrants caution. While the draw in gasoline inventories is supportive ahead of the peak summer driving season, the large 3.5 million barrel build in distillate stocks is a bearish signal. This could weigh on the profitability of refining margins, known as crack spreads, for products like diesel and heating oil.
We must also consider the supply-side dynamics from the OPEC+ alliance, whose recent decision to potentially unwind production cuts starting in October is the source for surplus projections. Historically, adherence to these plans can vary, and geopolitical events often disrupt expected supply returns. This creates a fundamental tension between the current tight market and future supply promises, which will likely fuel volatility.
