Crude oil has found slightly firmer footing again today after a tumultuous start to 2023. Both the WTI and Brent futures contracts finished down around 8.5% last week. Energy prices in general have softened so far this year as temperatures in Europe and North America have been slightly warmer than anticipated. This is despite several cold fronts moving through both continents. Additionally, the level of European gas stockpiles is higher than what would normally be the case at this time of year. The build-up has somewhat alleviated the threat of Russia’s invasion of Ukraine on supply. Strong US jobs data on Friday may have stemmed the tide on negative global growth news, but the spectre of a recession in the world’s largest economy continues to weigh on sentiment. The Federal Reserve has made it clear that they are focussed on containing runaway inflation rather than stoking economic growth. Crucial US CPI data will be published this Thursday. It will be closely observed for clues on the potential outcomes of the upcoming Federal Open Market Committee (FOMC) meeting in early February.
A stack of Drum barrel
The Meeting Minutes From The December Conclave Revealed a Degree.
of frustration from the board regarding the public perception of the committee’s reaction function. 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. Contango is the opposite of this. It is when the contract closest to settlement is cheaper than the contract that is settling after the first one. It potentially reveals a lack of urgency to take delivery of the product. In the WTI oil market currently, contango has moved to its deepest level since November 2020. At that time, the price was significantly lower than where it is today. Of course, the landscape for energy was also notably different. Nonetheless, contango might be telling us something about the supply and demand dynamic for crude. At the same time, volatility remains fairly low, which may suggest that the market is not overly concerned with the current price action.