Oil Prices Are Plunging, Curve Crashes Into Contango

Oil prices are plunging this morning as futures contracts roll with the Jan 23 WTI contract price trading with a $77 handle.

There’s little fresh news, but analysts say the rise in COVID-19 cases in China has renewed worries about energy demand.

China’s State Council warned cities to avoid “irresponsible loosening” of COVID-19 measures, according to the South China Morning Post.

“Commodity markets have been under pressure as China’s zero-COVID strategy has strangled economic growth. Without any signs of softening, commodity markets had factored-in that status quo for the foreseeable future. Looser quarantine rules suggest an end to the restrictions are closer than we thought,” ANZ Bank said in a note.

Additionally, recession concerns have dominated recent oil market trading even with the European Union’s ban on Russian crude approaching and OPEC’s efforts to tighten supply.

Traders expecting a looming European ban on Russian oil to juice prices have been surprised: physical crudes are weakening in the latest twist in a volatile global market.

From Houston to Singapore, demand for barrels has slipped even with European Union’s Dec. 5 ban in prospect.

“There’s a lot of confusion in this market right now,” Amrita Sen, chief oil analyst at consultant Energy Aspects said in a Bloomberg TV interview.

“Yes, demand in China is weak and this is something we’ve been saying for some time.

“The thing is, the rest of the world demand is actually pretty decent,” she added.

WTI puked back below $80 (trading with a $77 handle at its intraday lows) to its lowest since September…

Additionally, the nearest position of the US crude futures curve is now flashing oversupply for the first time in a year.

The front-month spread between futures for delivery in December and January, which reflects short-term supply-demand balances, traded in shallow contango – the industry term for the bearish market structure – on Friday ahead of the December contract’s expiry.

The Jan-Feb spread is also in contango…

“Bottom line here is that demand for oil out of Asia isn’t good and while it may be decent in the US, it’s struggling with the pipe outage that slows exports and generates weakness that may last for a few weeks,” said Scott Shelton, an energy specialist at TP ICAP Group Plc.

“The market positioning was the exact opposite, which has forced liquidation and made this even worse.”

However, several traders have noted that last week we had another 4 million barrel release from the SPR, which means the price is completely distorted. Biden’s SPR drain scheme is due to end in a few days, which means to a greater extent, oil price may once again be determined by actual supply and demand, which traders suggest means prices are likely to soar.

Finally, we can’t help but note the coincidence of this sudden dump in crude prices on the day that the Biden administration suggests immunity for Saudi’s MbS?

Is the market pricing in the imminent ‘quid pro quo’ of a possible Saudi/OPEC crude production increase?

This would seem odd given the price drop is vindication for OPEC+’s decision to cut production as their fears about oil demand appear justified.