The structure of the oil futures market is showing signs of sluggish global oil demand and sufficient supply, despite the imminent EU embargo on imports of Russian crude oil from December 5.
Prices of crude grades on the physical market have declined this month, while the futures market is flirting with contango compared to large backwardations seen earlier this year.
Contango is the state of the market in which prices for delivery at later dates are higher than prompt prices—a market situation signaling oversupply. The opposite market situation—backwardation—typically occurs at times of market deficit, and in it, prices for front-month contracts are higher than the ones further out in time.
Last week, the front-month futures prices of both major benchmarks, WTI Crude and Brent Crude, were in and out of contango compared to the second-month futures, signaling a weak demand or an oversupply, or a combination of both.
China’s surging Covid cases and the return of restrictions on movements in as many as 50 cities in the world’s top crude oil importer weighed on market sentiment and demand expectations for the near term. Early on Monday, oil prices slumped to the lowest level since December 2021 due to the continued lockdowns in China and the rising revolt against restrictions. Related: UAE To Cut Oil Supply To Asia By 5% In December
“The fact that the market is not pricing in a premium for oil ahead of the December 5 EU embargo on Russian seaborne crude exports highlights the impact of a sharp slowdown in China,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said in a commodity markets analysis on Friday.
“The mood in the oil market has considerably soured since the beginning of the month,” oil broker PMV said on Friday.
The market structure in WTI Crude is indeed weak, considering that the front two spreads are now in contango. The same goes for Brent, although to a lesser extent, PMV noted. Brent Crude front-end backwardation, which jumped as high as $5 a barrel earlier this year, is now flirting with contango and is more than $1.50 per barrel below the levels seen at the beginning of the month.
“Indeed, more than 7 mbpd of crude oil left US shores last week versus the annual average of 6.3 mbpd, yet both outright prices and the structure imply sluggish demand,” the broker said.
By Tsvetana Paraskova for Oilprice.com
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