The Looming Shift: Oil Markets Signal a Structural Phase-Change
We are witnessing a fundamental shift in oil markets, a structural phase-change.
Oil prices hit their lowest point last week since June 2022, when the market was gripped by fears of a global recession (Figure 1). On September 6, WTI crude price dropped more than $3 below its lower Bollinger band (yellow shading), indicating a potential oversold condition. This suggests that prices could see a short-term rebound driven by technical factors and they are somewhat higher this morning September 9.
However, this doesn’t alter the broader challenges facing the oil market, where fundamental forces continue to exert downward pressure.
Source: CME & Labyrinth Consulting Services, Inc.
Analysts have explained everything in recent months with narratives of a faltering Chinese economy, more crude flowing from non-OPEC producers, central bank interest rates, and the laughable claim that renewable energy is already curbing oil demand.
They miss the underlying issues that actually drive market movements. It’s about the affordability of things—not just oil–and it’s rooted in a chronic misunderstanding of how energy systems really work. All this chatter about production cuts and demand forecasts is just a sideshow to the main event. Oil prices have been supported positively by geopolitics and negatively by economics for at least the last 50 years.
More concerning than oil price is the change in the shape of futures contract forward curves. Figure 2 shows that the Brent futures curve moved from steep backwardation on August 30 (dashed black curve) to what looks like a transition to contango last Friday, September 6 (red curve).
Brent 12-month spread dropped -$3.90 (-77%) and 6-month spread fell -$2.80 (-76%).
Front-month price decreased -$7.74 from $78.80 to $71.06.
Source: CME & Labyrinth Consulting Services, Inc.
When a market is in backwardation, oil contract prices decrease as the delivery date moves further into the future. This reflects tight supply conditions, where buyers are willing to pay a premium for immediate access to oil. Conversely, when markets are in contango, future prices are higher than current prices, reflecting an oversupply. In this scenario, buyers are only willing to take near-term deliveries at a discount. Producers anticipate that oil will be cheaper to store and deliver later on when prices may be higher.
Both Brent and WTI have been in backwardation since mid-December 2020, indicating persistent short-term supply constraints and strong current demand. That is the conventional lens through which many analysts continue to operate.
Forward curves last shifted from backwardation to contango in February 2020 as the COVID recession began (Figure 3). The initial change took place in just a few weeks.
Progression of Brent term structure from backwardation to contango January – March 2020.
Source: CME & Labyrinth Consulting Services, Inc.
Is this what happening with oil forward curves? It’s too early to say.
The oil trading group Trafigura said that Brent crude is probably heading into the $60s soon. Gunvor, another giant oil trader, commented:
“There is absolutely no demand growth at all in the world on…gasoline. You need a lower oil price than you see today,…and that’s probably below $70.”
Torbjörn Törnqvist, Gunvor CEO
More bullish analysts believe that what is happening now reflects negative market sentiment, and that fundamental factors indicate that the drop in oil prices is overdone.
“In oil the fundamental physical picture is still intact, inventories are drawing. The financial market, however, is where the bearishness is and it’s trading the forward outlook, not today.”
Jeff Currie, Chief Strategy Officer at Carlyle Group’s Energy Pathways
A similar view was expressed this morning.
“The reality is if you look at the price of oil based on supply and demand, we are undervalued obviously because of the technical mood. We cannot rule out further weakness but the disconnect between the prices and the supply side cannot be ignored.”
Most analysts cling to a familiar narrative, assuming the patterns of the recent past will persist. But they fail to see the deeper structural forces at work, ignoring the fundamental shifts that are reshaping the future of energy markets. The status quo is their safety net, and they’re blind to how quickly it’s unraveling.
Markets aren’t always right, especially when it comes to anything beyond short-term profits. Yet, in moments like this, I ask myself, what do markets see that we might be missing? Right now, oil markets are signaling a shift—a shift that echoes the dynamics we saw in late 2014 and early 2020. It’s not just about prices; it’s about deeper, structural changes that the market, in its own way, is picking up on. A storm is building.
Energy, debt, geopolitics, complexity, psychology, and ecology are the real issues shaping our world. Yet, analysts remain stuck in familiar narratives. The truth is much messier, and far more serious, than these simplistic headlines. The global economic machinery, supported by cheap energy and debt, is fracturing, but analyst focus remains on symptoms, not the underlying structural collapse.
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Hi, Art, my friend. Thanks for the continued education. PS Paragraph right after the final graph has a typo/missing word in the first sentence. Best to you and the fam.
Hi Candy,
Thanks for catching my confusing syntax.
Fam is fine. Best to yours.
Art
Thank you Art and Anne. Oh, the most salient feature of AI in this regard isn’t its ability to be helpful but that it is an example of a step change in energy CONSUMPTION I think you may agree.
Reference Art’s answer to John Rogers above, generally and comprehensively in his recent writing; there is a transition, transitions including structural collapse in markets and bio-physical systems. It’s bigger than analysts in individual markets can capture. Phases such as ‘storm brewing’ and certainly ‘structural forces’ may be much more accurate to describe the condition at this point than others.
I am still confused though as to how the world population can continue to grow steadily with all striving to have an ever higher standard of living – and the price of petroleum goes down? I understand the tenuous nature of the Human Enterprise and its coming demise as it wrecks the planet’s ecosystems, creates forever wars, runs up massive debt, and all the rest. But, pre-collapse shouldn’t the basic laws of supply and demand remain in effect? Or are you saying that ecological, economic, political and social collapse is here now? We won’t need energy in this dystopia?
Scott,
The basic laws of supply and demand are part of the story for sure but energy can only be understood within the larger context of the human superorganism. I described the “choke-chain effect” in a post earlier this year that I encourage you to read: https://www.artberman.com/blog/why-im-not-an-oil-bear/
I believe it will help you with your confusion. Supply urgency is always the story playing in the background even as prices are now falling. Markets are torn between this and the shorter term constraints that higher prices put on economic growth. It’s a tug-of-war that describes the higher frequency behavior which underlies the story in the background.
All the best,
Art
Poetic last line, Art. I’m not an energy or numbers guy, but the arguments I’ve read to that effect seem convincing.
The question for all of us, perhaps: What does a world of sustained, significantly higher oil prices look like? At a minimum, I suppose it surely doesn’t look like today’s global concatenated complexity, where things seemed held together by tape and dreams.
Pete,
I wrote recently about the world oil macro: https://www.artberman.com/blog/the-oil-and-energy-macro/
“Energy lies at the heart of global power struggles and the downward arc of economic prosperity”
The secular boom and bust cycles for oil are important but the bigger picture is increasing scarcity.
Read the post, please, and let me know what you think.
All the best,
Art
An explanation of “A storm is building,” and “structural forces” are causing the “global economic machinery” to fracture and undergo “structural collapse” is needed. These phrases are opaque. Observations pertaining to matters of great global importance, such as “structural collapse,” should be explained.
Mr. Berman’s article can’t be understood unless these phrases are explained in reasonable detail.
John,
What you see is what you get. You will have to read my many other posts to fill in the details. This post is an alert on a specific topic and not a PhD dissertation.
All the best
Art
Thank you for explaining this, and giving us examples from the recent past where financial and geopolitical conditions were similar. War takes a lot of oil, no matter how profitable for some, and extracts its toll on everything we buy. Doing without or doing with less might be the solution we in the working class adopt.
Kimberly,
I doubt that any substantive change will be adopted by any group or class of people but I will be glad to be wrong.
All the best,
Art
The magical AI models create their forecasts from history. I know from experience that fitting a curve model to historical numbers is basically worthless when underlying conditions change
Anne,
You are correct that past is not a good model for future if underlying conditions change. I think the problem is more fundamental, however, because much of the analyst narrative is based on fitting the present to outdated paradigms.
All the best,
Art