The price structure of the Brent complex was close to contango Tuesday morning due to ongoing weakness in light sweet crude oils, said traders.
July ICE Brent was trading at a mere $0.09/b premium to August by 1030 GMT, down from $0.28/b Monday afternoon.
It fell to an intraday low of $0.01/b earlier in the morning.
Physical North Sea benchmark Dated Brent flipped to contango Monday -- when prompt material is priced below further forward material -- highlighting weakness in the physical crude oil markets, said traders.
"Welcome to contango... it's about time that the weight of the physical market got reflected into the price structure," said one trader.
"Our West African traders have been struggling for a while and there are huge surpluses in the Med, the market needs it," he added.
Light sweet crudes from the Mediterranean basin and the West Africa region have traded at deep discounts to the Dated Brent benchmark in recent weeks, with some grades such as CPC Blend reaching historic lows.
Traders have blamed production increases in countries such as Saudi Arabia, Libya and Iraq, as well as lower-than-expected demand for refined products in Europe and Asia, for the price falls.
OPEC is currently producing more oil than needed to balance the world market, which remains well-supplied, the group said Tuesday in its latest monthly oil market report.
However, an arbitrage play between the North Sea and South Korea helped by a trade agreement struck last year kept the Brent complex backwardated for the past month, and could well reappear later this month, said traders.
"I am surprised [by the price fall] as we think VLCCs will go to Korea in the second half of July," said one trader.
"The price pressure from the non-European Atlantic Basin light sweet crude oil is starting to spill over into the North Sea and more VLCCs of Forties will have to be pushed out to South Korea if one wants to avoid having a contango returning to Brent futures," said Petromatrix in a note.
