US accounting rules, which can bolster end-year oil prices by encouraging companies to run down stocks, are this year helping to cool overheated markets by creating a glut of prompt supply, analysts say.
Each year oil companies seek to manage stock levels to avoid tax through US Last In/First Out (LIFO) accounting methods according to which firms pay tax on the value of crude inventories they hold at the end of the year.
The race to run down stocks in December can push up oil futures prices as investors anticipate a shortage.
But near-term crude prices sink lower as refiners step back from buying and physical crude markets become oversupplied. The effect has been amplified this year as high prices increase incentives to lower year-end stockpiles.
"It's a blessing as opposed to a curse," said Deborah White, senior economist at S G Commodities of this year's LIFO impact.
"The impact is going to be more pronounced when there is a large price movement in either direction," said a source with a major oil company who asked not to be named.
Physical prices for high-quality low-sulphur crude have fallen sharply from peak levels touched in October and traders said the reluctance of refiners governed by the LIFO rule to build December-arrival crudes had contributed.
"The insatiable desire for sweet crude seems to have fizzled out. There is a prompt glut coming up to the year-end. People are less and less inclined to pay up for expensive crude at the year-end," said William Buchanan of Standard Bank.
The weakness in the physical markets has filtered through to futures prices, which have fallen around $8 from October record highs when Brent futures hit $51.94 and US futures reached $55.67. They are still more than 30 per cent higher a year ago.
Weakness at the prompt end of the market is reflected by a collapse in the front-month Brent futures spread to historic lows of less than minus a dollar.
Price relief is probably only temporary, however, many analysts say, citing in particular tight distillate stocks.
According to the latest US crude inventory data, distillate stocks are 17 million barrels lower than the same time a year ago, while crude stocks are 1.4 million lower.
Traders anticipate that once the market goes beyond December-arrival barrels, prices could rise sharply.
"It's going to be interesting in mid-December when people start to trade January barrels," one physical trader said.