Insights 
VT 
Brent forward contracts have faced pressure due to an oversupply in the oil market, leading to a drop in backwardation observed a month ago. Recently, the market showed signs of contango with the 6-month contract trading higher than the front month. However, due to recent oil price increases, backwardation has strengthened again, with the next Brent forward contract trading $2 above the one for six months. This change is influenced by a possible cut in oil supplies from Russia following US sanctions.
In the gasoil market, backwardation also lessened but did not switch to contango. Russian diesel supply constraints have created a shortage in the European market, partly due to Ukrainian drone attacks on Russian refineries reducing diesel production. The IEA reports a drop in Russian gasoil exports from 800,000 barrels in August to 720,000 in September. In September 2024, this export number stood at 840,000 barrels. A ban for resellers since October 1 has further tightened supply, pushing the gasoil price to over $700 per ton, with the gasoil crack spread widening to $27 per barrel. The FXStreet Insights Team provides market observations and insights from experts on such developments.
Brent Forward Curve
We are seeing the Brent forward curve steepen into backwardation again, a pattern reminiscent of what happened around this time last year. The front-month contract is now trading at a premium of nearly $3 over the six-month contract, which is even wider than the $2 spread we saw in late 2024. This signals that the market is very concerned about immediate supply availability.
This tightness is largely a response to renewed fears over Russian oil supplies following the latest round of US sanctions announced last month. We’ve seen Russian seaborne crude exports dip below 3 million barrels per day in recent weeks, a significant drop from the more stable levels of over 3.4 million barrels per day seen earlier in the year. For traders, this suggests that long positions in near-term Brent futures could be profitable as long as these supply risks persist.
The situation in refined products, especially gasoil, is also mirroring the tightness we observed in 2024. The market for diesel is showing significant strength, indicating that this is not just a crude oil story. Traders should therefore be looking beyond just the main Brent contract.
Ukrainian Drone Attacks
A renewed wave of Ukrainian drone attacks on Russian refineries over the past month has further constrained diesel output, compounding the issue. This has pushed the gasoil crack spread above $30 per barrel, a notable increase from the $27 level seen a year ago. Bullish positions on the gasoil/diesel market, or trades that favor gasoil over crude, appear well-supported by these fundamentals.
Given these dynamics, derivative strategies that benefit from volatility and upward price pressure are worth considering. Buying call options on near-dated Brent or gasoil contracts could offer upside exposure while limiting risk. The market is pricing in a supply risk premium, and any escalation could cause these spreads to widen further.
