Oil’s Recurrent Re-Curving

The post-Pfizer vaccine rush pushed most of the contango out of the WTI futures curve. The aftermath of the Georgia Senate vote, and with it dreams of even larger, more carefree fiscal “stimulus”, drained all the rest. As of this week, the entire crude curve is once more contango-free; backwardation front to back.

The physical markets have been able to fundamentally rebalance. The major worry had been due to a precarious buildup of gasoline stocks, which, even as seasonal (winter) accumulation sets in, has been successfully surmounted.

Inventory levels up to the end of November had been at record levels, the physical market since adjusting such that accumulation so far during the seasonal trend has been lighter than some of the more challenging of recent years (such as last year when the US economy was nearly at, or even in, recession before COVID struck; or the year before in the wake of 2018’s landmine).

Gasoline stocks remain elevated, though, if no longer egregiously so. Small progress is better than none at all.

Further back down the distillate chain, overall domestic crude stocks have likewise rebalanced but not quite in the same semi-satisfying way as gasoline. Inventories of raw material are also high, still among the highest on record, but no longer alone at record issues.

Together, somewhat eased inventory conditions have supported the shift in focus toward what the market hopes is a thoroughly vaccinated, closer to normal future. With supply no longer the big and obvious drag, the entire WTI curve has been able to shift upward by around $8 since early November; in the front months, as contango was purged, by more than $15.

The problem, such that there remains one, is that this demand-centered view is entirely future tense. Right now, we are still stuck with an obviously depressed economy. In gasoline, the estimated balance of product “supplied” (a proxy for economic use, or demand) remains catastrophically below any recent yearly comparisons. Like we find in employment data, the economy’s use for gas, in particular, dropped way off in March and then only partially rebounded with reopening in May and June.

Since then, economic demand for this refined energy product has been more or less consistent with the lack of further job growth – as has the shortened rebound in total demand for all energy products.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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