Why Are Oil Prices Crashing?

WTI price was above $92 on November 4 and closed less than $75 on December 6. Brent closed below $80 for the first time since January 3.

What’s happening now in oil markets is probably a squeeze in which traders are unwinding their long positions, and it should pass. That said, it has all the signs of a price collapse. Whatever the explanations, structural changes are being reflected beyond the ordinary interplay between fundamentals and sentiment.

The 12-month spread between the WTI January and December 2023 contracts has fallen -$1.55 (-72%) since last Friday, December 2  to its lowest level since December 2020. WTI went from 3-month contango last Friday to 8-month contango on Tuesday, December 6 (Figure 1).

Figure 1. WTI in 8-month contango & 12-month spread has fallen -$1.55 (-72%) since December 2. 6-month spread fell -$0.86 (-430%). Front-month price decreased -$5.73 (-7%) from $79.98 to $74.25. Source: CME & Labyrinth Consulting Services, Inc.

Cross-over of WTI 50-day, 100-day and 200-day exponential average curves corresponds to major, structural price declines in 2008, 2014, 2018 and 2020. Cross-over also occurred in December 2022 (Figure 2).

Figure 2. Cross-over of WTI 50-day, 100-day and 200-day exponential average curves corresponds to major, structural price declines in 2008, 2014, 2018 and 2020. Cross-over also occurred in December 2022. . Source: CME, EIA & Labyrinth Consulting Services, Inc.

Analysts have been offering a daily chorus about “incredibly tight markets” for most of 2022.  For awhile, it seemed reasonable. Certainly the Russian invasion of Ukraine created extraordinary market dislocations that pushed energy prices to 10-year highs. But for 75% of the time since June 15, WTI price has been less than its 20-day average (Figure 3).

Only OPEC’s threat to cut production in late August (‘ABS Cut Comment’ in Figure 3) and subsequent delivery on that threat in early October (‘OPEC+ Cut Oct 5’ in Figure 3) lifted prices above that threshold before the descent that began on November 4.

Price has fallen -$18.36 (-20%) since November 4 and has decreased -$5.73 (-7%) from $79.98 to $74.25 since last Friday, December 2

Figure 3. WTI futures price has decreased -$5.73 (-7%) from $79.98 to $74.25 since December 2. Price has fallen -$18.36 (-20%) since November 4. Source: CME & Labyrinth Consulting Services, Inc.

Two weeks ago, Goldman Sachs forecasted an average Brent-price of $100 for the fourth quarter of 2023. At that time, Brent needed to average $110 for the rest of the year to reach $100. Since then, it’s averaged $84. As of December 2, Brent needed to average $118 for the rest of the year to reach an average of $100. That’s not going to happen.

Goldman’s call should be dismissed as misleading and irresponsible. In other words, they are pitching their book.

Things Are Not Returning to Normal

The 2020 global pandemic was a watershed event that completed a paradigm change for oil markets that began with the Financial Collapse of 2008.

 

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