WTI/Brent Futures Curves-what are they telling us

We have just seen a rather large sell off in both the WTI and Brent markets. Right now the overall global growth slowdown theme is taking precedence above all.

For more details on this you can listen to Macrovoices Energy Week Podcast 15 May where we discuss the bull/bear scenarios in great detail.


First lets define the curves.

Backwardation happens when a commodity is scarce and/or perceived to be, and the immediate need to own it outweighs the cost of carry. For crude oil, this is a worry about supply, whether its geopolitical, weather, production etc. For long specs in the market this is a favorable condition as they expect the market to rise over time. Contango is the opposite of this.

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Now, lets set aside price for a moment and just look what the very FRONT END of the curves are telling us. (the back end will be a discussion for another day as it can be subject to financial manipulation and discord with the physical market)

I will start with 1 Feb. when the US first enacted sanctions on PVDSA. (for the purpose of this exercise I have deliberately left off the Y (price) axis)

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Now look what happened over time as pressure on the Brent market increased due to Venezuela and Iranian oil sanctions, geopolitical issues (Libya), Russian oil contamination and most recently Mexico tariffs.

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Clearly this market is jittery about supply issues.

Just look at the difference from 30 May to 31 May (see above) after Mexican tariffs were announced. The front end, got notably spooked steeper.

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Now let’s take a look at the WTI market. This market is telling us an entirely different story.

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The front end of this market has stayed in contango, albeit has shifted, as concerns of over suppy due to rising US production, pipeline constraints out of the Permian, and refiners need for more medium heavier based crude grades are (just some of the things) plaguing this market right now.

We can take the Mexico tariff announcement again and compare. This market went clearly steeper into contango from 30 May to 31 May (above)

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In sum, the curves are telling us that the market is still anxious about Brent supply, even after a massive sell off, whereas, concerns of over supply are still pulling on the WTI market.

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