The Oil Price Rally Is Over

Last week I wrote that the the oil price rally was ending.  To some it may look like a price collapse now. I don’t think so but the price rally is clearly over for a while.

Today, WTI futures price fell -$2.80 (-5%) and Brent fell -$1.45 (-2%). The spreads, however, are revealing.

The WTI 12-month spread fell -$0.92 from $3.65 last Thursday to $2.73 today (Figure 1). That’s a -25% drop in one business day. The spread has fallen -$1.89 (-41%) since March 29. It has decreased -$3.77 since March 5. That’s the biggest drop since prices began to collapse in early 2020.

Figure 1. WTI 12-month spreads are collapsing. Spread fell -$0.92 (-25%) from $3.65 on April 1 to $2.73 on April 5. Spread has fallen -$1.89 (-41%) since March 29. Source: Quandl & Labyrinth Consulting Services, Inc.

Front-month price moved to its lowest level in more than 2 months at $58.65. The forward curve is in prompt-month contango and its term structure is flatter than it’s been for weeks (Figure 2). At the same time, it doesn’t look like a collapse in this context, at least not yet.

Figure 2. WTI 12-month spread fell -$0.92 (-12%) from $3.65 to $2.73 on April 5. 6-month spread decreased -$0.37 (-29%) from $1.28 to $0.91. Front-month price decreased -$2.80 (-5%) from $61.45 to $58.65. Source: CME & Labyrinth Consulting Services, Inc.

Brent 12-month spreads reversed today from the lowest level since January last week. The spread increased +$0.48 from $2.42 to $2.90 on Monday, April 5 (Figure 3). That looks less dire than WTI spreads..

Figure 3. Brent 12-month spread reversed from lowest level since January week ending April 1 and increased +$0.48 (+20%) from $2.42 to $2.90 from April 1 to Monday April 5. Source: Quandl & Labyrinth Consulting Services, Inc.

Both WTI and Brent prices are about +$0.60 to $0.70 higher in early trading as I write at 10:00 p.m. Houston time. I don’t think prices are collapsing but it is improbable that they will regain March highs any time soon.

The rally was over a few weeks ago but until late last week, there was hope it might resume its upward momentum. That seems unlikely for now. I doubt that the Saudi oil minister is feeling too good about OPEC+’s  decision last week to increase output and his decision to raise Asian prices.


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