(Bloomberg)--Aluminum futures moved more deeply into contango in the last few weeks on concern that higher oil prices may boost production costs, according to Bank of America Merrill Lynch.

The spread between aluminum for 15-month delivery on the London Metal Exchange and cash metal was at $115.25 a metric ton today based on official prices, widening from $96.25 at the end of February and $67.25 on the last day of January. Crude rose to a 29-month high of $106.95 a barrel in New York on March 7.

“You often find that when energy prices rise, the forward prices tend to perform better than the nearby prices,” London- based Bank of America Merrill Lynch analyst Michael Widmer said in an interview March 11.

Aluminum production is “energy-intensive,” so smelters are often found in locations with plentiful resources of inexpensive energy such as hydropower, according to the International Aluminium Institute. Producing a kilogram (2.2 pounds) of the lightweight metal from alumina takes 15.7 kilowatt hours of electricity on average, its website shows.

Contango describes a market structure in which later-dated futures trade at higher prices than contracts for earlier delivery.

Widmer also said metal held in warehouses that’s locked into financing transactions will probably stay there because the price movement made it more profitable to renew the accords. About 70 percent of aluminum inventories tracked by the LME are tied to financing transactions, according to estimates by Societe Generale SA analyst David Wilson.

Steeper Curve
“Economics of financing deals have improved during the past two weeks because the forward curve has steepened,” Widmer said. “The more economic those financing deals are, the less likely you are to take metal out of the warehouse.”

A financing transaction involves a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of the contango. Profit on the deals is influenced by financing costs and expenses for storing metal.

Aluminum for 15-month delivery was at $2,590.50 a ton today, compared with $2,475.25 a ton for cash metal, official LME prices showed.