The contango situation seen in Brent Crude Oil futures could prevail for some more time and could impact other markets like WTI crude oil. The collapse of brent crude term structure from a healthy level of backwardation to super contango could be explained as a possible reversal in record bullish positioning among the market participants but there is a big shift in structure at work, according to Bank of America Merill Lynch (BofAML) in a weekly energy report.

(Contango is a situation in futures market when far month contracts are priced higher than near month contracts. Backwardation is the normal trend when near month contracts are priced higher than far month.)

The Brent term structure fell sharply and a way not seen since 2008. The front-month Brent has moved from a healthy level of backwardation to a very steep contango. With front-to-third month spreads showing a $1.20/bbl contango, floating storage has come back into play. But this change, though unusual market development , unlikely to last.

Long-dated prices have continued to run higher from a low point of $87/bbl in January to $99/bbl in the last trading sessions. Fundamentally, inventory trends seem to have reversed following three and a half years of steady stock draws across OECD ex-US storage facilities.
Brent term structure is both persistent and contagious, BofAML weekly report said., Based on past trends, It could be said that when Brent falls from backwardation into contango, it tends to spend an average of 36 days in contago and tends to impact other markets like WTI. Thus, while some of the recent move could be partly explained by a possible reversal in record bullish positioning among market participants, a big shift in structure could be seen at work.
Brent and WTI crude oil prices no longer trade in as much tandem as they used to. Yet the significance of Brent as an explanatory variable of WTI crude oil moves remains as high as ever.

Correlation of WTI and Brent timespreads also remains high by most measures. With Brent front-month contracts firmly in contango, some of this weakness may feed into WTI. The surging domestic US production coupled with the upcoming refinery turnaround season will likely result in a temporary oil surplus in the Midwest in 2H14. Plus major inventory draws at Cushing seem to have reversed already and small builds could result in big swings in prices. While recent condensate export licenses may help, WTI prices are seen falling below $100/bbl.
Source: Bank of America Merill Lynch (BofAML)