March 9, 2020 / 1:03 PM / a month ago

Oil dives deep into contango as price war begins

FILE PHOTO: A crude oil tanker is seen at Qingdao Port, Shandong province, China, April 21, 2019. REUTERS/Jason Lee/File Photo

LONDON (Reuters) - Brent and U.S. crude contracts were deep into contango on Monday, hitting a four year low, as oil prices lost as much as a third of their value after Saudi Arabia signalled it would hike output to win market share.

The six-month Brent contango spread LCOc1-LCOc7 from May to November widened to as low as $3.70 barrel, a level not seen since late 2016.

(Graphic: Brent futures 6-month spread - here)

Brent crude was in contango LCOc1-LCOc2 for as much as $0.88 a barrel earlier in the session between prices for May and June, the lowest level since Nov 2018. It recovered to $0.65 a barrel at 1210 GMT.

For U.S. West Texas Intermediate (WTI) crude the contango CLc1-CLc2 between May and June prices was $0.41 a barrel, after hitting a session low of $0.55 a barrel, the lowest since Dec 2018.

Contango is a situation where the futures price of a commodity is higher than the spot price. The structure of the market has significant implications. Besides encouraging storage of oil, contango also hurts financial investors who have to pay a premium every month they renew a futures contract.

Reporting by Bozorgmehr Sharafedin, editing by Louise Heavens

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