WTI Backwardation Slips as Price Falls Below $90/Bbl
Oil prices have come under pressure over the past two months, dropping below $90/Bbl for the prompt-month WTI contract. The nearly $34 drop in WTI since the June peak of $122 comes amid oil demand growth concerns and a strong U.S. dollar.
The prompt-month or headline price is important, but the shape of the forward curve and future price levels are important to hedgers trying to make decisions. The chart below shows how the WTI curve has evolved in the past week and month. Notice the significant movements in the front of the curve as current prices sit below $90, but longer-dated tenors have been more stable.?
Historically, WTI still sits in the 70th percentile of prices for the past ten years. At $88/Bbl, WTI is also near its one-year average, as shown in the chart below.?
The backwardation, or downward sloping curve, has dropped to about 10% from the recent 25% for the twelve-month spread. In other words, the percentage difference from the 13th-month WTI futures contract to the prompt-month contract has fallen to 10%. Still historically elevated, as the chart shows, but nevertheless, a flatter curve.
Oil market sentiment has become more bearish lately as attention turns to a recession's potential impact on oil demand. Weak oil demand growth could push the global crude market into surplus and thereby reduce prices. Despite some indications of global demand destruction, we believe the still elevated backwardation is a market signal that supply, and demand remain tight. We would like to see more softening in WTI term structure, among other things, before shifting our view away from price risks remaining to the upside.?
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