John Kemp, Reuters

Crude oil traders have started to price in the resumption of North Sea shipments on the Forties pipeline with spot prices stalling and nearby calendar spreads returning to levels before the pipeline was shut down.

Pipeline owner Ineos is working on several repair options and said it expects operations to resume within two to four weeks of the original shutdown on Dec. 11.

Brent futures for delivery in February have eased back to under $64 per barrel from a high of almost $66 immediately after the shutdown and are no higher than they were at the start of November.

The February-March calendar spread has shrunk to just 31 cents backwardation from a peak of nearly $1 per barrel and is almost back to where it was before the rupture. Calendar spreads for the first six months have continued to tighten, but in line with the pre-shutdown trend and now show little impact from the disruption.

The strong and consistent rally in crude and products prices between the end of June and early November appears to have petered out, at least for the time being.

Hedge funds and other money managers are sitting on a record bullish position in Brent futures and options and a near-record position in crude and products derivatives more generally.

But with the exception of Brent, there has been no significant advance in positions in U.S. crude, gasoline and heating oil, as well as in European gasoil since the second half of November.

In fact, hedge funds have lightened their bullish positions in WTI, gasoline and European gasoil since the end of last month, as fund managers have taken some profits after the rally. The buildup of a massive bullish long position in oil and the limited number of short positions that remain to be covered as itself become a major risk to prices.

In the past three years, a large imbalance between hedge funds’ long and short positions has normally preceded a sharp reversal in the price trend. The current imbalance, with hedge funds holding almost nine long positions in crude futures and options for every short position, is among the largest on record.

So far, the outage on the Forties system seems to have discouraged more short-selling and kept oil prices stable just below their recent highs. The approaching holidays over Christmas and the New Year period have also limited trading activity and price moves.

But within the next two weeks, the holidays will be over, and the pipeline should have resumed operations or be very close to it.

The tension between a near-record long position in crude and products (a major source of downside price risk) and tightening fundamentals (a potential source of upside price risk) will then come into clearer focus.

In recent months, the oil market has been very quiet. Oil prices have adjusted very smoothly to events since the middle of 2017. Realized volatility has been significantly below the long-term average and has trended lower.

But the first weeks of next year are shaping up to be very interesting.