EC Okay, NYMEX, Go On …

Well, that will get everyone’s attention, at least for now. Should something happen to the crude oil rocketship, there goes inflation. A day after the FOMC releases substantial upward revisions to inflation rates its models now project for this year, the NYMEX pits jump all over them with oil’s worst day since just after last April’s negative price turmoil.

Before we venture into the “why”, let’s start with “what.”

The front-month WTI futures contract plummeted by just under 8%, dropping back below $60 per barrel from just about $66 a week ago. What’s important about this isn’t the scale of the decline nor the speed with which it came about, as usual, the interesting part is how the futures curve twisted while all that happened.

Over the last several days, a small bit of contango has reappeared between the front and second-month contracts. By itself, nothing alarming, though the possibility it could be the first sign of a shift in market positioning is being dangled in front of us; twisting typically starts up front.

Going back to when the inflation frenzy began in January, the entire curve had left contango behind in the 2020 doldrums easily entering backwardation. The 3-month calendar spread (a good measure of market conditions between liquid contracts with enough short run time in between them) had actually peaked in its downward sloping shape back on February 25; a substantial and relatively optimistic $1.46 in between the two prices on that day.

While the nominal price level had increased across the curve until March 11, by then this 3-month spread had already dipped back below $1 to just 91 cents. Now, as the WTI curve comes back down, the backwardation spread is just 29 cents today – the lowest since mid-January.

These things all together aren’t necessarily (see: October 2019) abnormal, they do happen from time to time. Even such a large price drop, or a large single-day crash happening during a time when the curve shifts dramatically flatter, it’s not unheard of by any means and historically it doesn’t always lead to a regime change in crude (and then everything else, since crude is a leading indicator).

But regime change does happen during those other times, too (see: February 2020; October 2018) which means this could possibly be the first step toward retreat, then worrisome contango. Or it might be nothing.

If the former, the reasons why are pretty plain and obvious; Uncle Sam’s helicopter or not, the oil market just can’t shake substantial headwinds on the demand side. The supply side, that’s easy (it’s always easy, going back to the “supply glut” days of Euro$ #3 that was nothing to do with supply); producers continue to sit on production, already raising serious questions/suspicions as to what they think of the market’s love affair with black gold the past few months.

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William K. 3 weeks ago Member's comment

What needs to be done for the benefit of everybody except speculators is a small change to the rules, making all petroleum future purchases CASH ONLY, no credit or other "leveraging" permitted. Not really an infringement on rights, just an alteration of the process.

The fact is that gas is one of the very few well defined commodities that folks need to have.