Crude Oil Price Claims the High Ground as Market Scrambles. Higher WTI?

Crude Oil, WTI, Brent, Saudi Arabia, China, Aramco, Fed, EIA, API, Backwardation – Talking Points

• Crude oil jumped to print fresh highs again yesterday
• Worries over China appear to be being ignored for now
• The oil market structure might be supportive of higher WTI

Crude oil made another 10-month high overnight despite some reservations about the outlook for China’s economy and central banks’ tight monetary policy. Nonetheless, the underlying market structure appears intact for now.

The Brent futures contract touched US$ 94.95 bbl and the WTI contract hit US$ 91.36 bbl.

Yesterday at the 24th World Petroleum Congress in Calgary, Canada, Saudi Energy Minister Prince Abdulaziz bin Salman expressed reservations when speaking about China’s demand going forward. He said, “The jury’s still out. This is the fundamental issue – the jury’s still out.”

The world’s second-largest economy has been struggling to reignite growth coming out of the pandemic era.

Recently, the Saudi Arabian national oil company Aramco and the US International Energy Agency (IEA) lowered their forecasts for global oil demand.

The backdrop to the current price action has been the tightening of many of the major central banks’ monetary policy to rein in high inflation. The concern is that global growth will need to slow to a point that could see oil demand undermined down the track.

Last week the European Central Bank (ECB) hiked its target rate again by 25 basis points (bp) to 4.00% and lowered its economic growth outlook.

The Federal Reserve meets tomorrow but is anticipated to keep rates on hold at this meeting, as is the Bank of Japan on Friday.

On Wednesday however, the Bank of England is forecast to lift its cash rate by 25 bp to 5.50%. To learn about the impact of central banks on markets, click on the banner below.

Despite all this, crude oil continues to surge higher. An indication of underlying supply and demand dynamics within the oil market is backwardation and contango.

Backwardation occurs when the futures contract closest to settlement is more expensive than the contract that is settling after the first one. It highlights a willingness by the market to pay more to have immediate delivery, rather than having to wait.

Sometimes referred to as a ‘time-spread’ between futures contracts with different expiry dates by traders.

Which particular contracts to look at is a personal preference, but looking at the front two contracts, backwardation has accelerated of late. If this remains the case, it might be revealing that demand remains robust, despite the higher prices.

Stockpile data from the American Petroleum Institute (API) later today and the EIA tomorrow might give further clues on the state of the balance of supply and demand in the market.

The full economic calendar can be viewed here.

WTI CRUDE OIL AND BACKWARDATION

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCarthyFX on Twitter