Thread by @Big_Orrin

1.Thread

The futures front month of pricing does not equates to the demand for cargoes in that loading month. It only reflects demand for a very small amount (less than 1% of global production) and that is under a very specific contract that only about 6-8 companies trade
#OOTT

2. That contract is the BFOET and the BFOET Partials contract. You buy one of those or 6 partial contracts (from same seller) and you will be delivered a cargo anytime the seller sees fit in the contract month.

3. The cargo delivered is the cheapest (when taking into account Quality Premium) of either Brent, Forties, Oseberg, Ekofisk or Troll. So you buy an April Brent BFOET contract you are paying April Brent futures+Exchange for Physical(premium/discount). It is a fixed price contract

4. The cargo will then be delivered any time from 1st of April to the the 30th of April. (actual date at time of purchase is unknown). This contract is really only played by the big boys BP, shell, vitol, Trafi etc. and is part of the "Chains" system.

5. So what does the April contract mean for actual cargoes being bought?

Currently April is the front month and its price reflects the price buyers of cargoes are paying for cargoes loading now in February, not in April.

6. The price of crude oil a buyer pays is typically based on the Bill of Lading. The Bill of Lading is when the boat has finished loading and all the paperwork completed. That pricing is typically the average of the Benchmark price over fixed number of days + quality differential

7. Example, WAF typical price a buyer pays is the Average benchmark settlement price for 5 trading days after Bill of lading (5 after B/L). If I have bought a cargo loading 3-4 Feb with a B/L of 4th of Feb, I pay the average of brent settlement on the 5th/8th/9th/10th/11th feb

8. other pricing periods commonly used are average of the month of the Bill of Lading (e.g. Middle East cargoes), 10 after B/L (urals) and 5 around B/L (North sea). 5 around would mean average settlement on 2nd/3rd/4th/5th/8th of Feb for a cargo with B/L 4th of Feb.

9. The above case is if you use Brent futures as your benchmark. It is even more complicated when you use Dated Brent. It is calculated using the second Brent month. therefore the April Contract for Dated Brent related contracts were for cargoes loading in January.

10. Therefore, the idea that trading the April contract has anything to do with April loading cargoes is not really the case. Price paid for most April loading cargoes will be determined by the June or even July Brent contract. Not the April. Demand is determined by those prices.

11. That is what refineries will be assessing not the front month price. Only reason for a refinery to look at front month price is if considering a very prompt cargo because they have a need either due to problems with other cargoes or they have processed more than they forecast

12. With strong backwardation and high inventories there is no reason for a refinery to buy to store. So apart from a few North Sea cargoes (and occasionally some urals), the front month futures contract has little to do with refinery demand in that month.

13. Note the WTI with physical delivery is a different beast. This was just to show Brent which prices around 80% of cargoes and does not have physical delivery. This note was to show how refiners look at things and how the physical market actually works.