Oil Prices Are Running Ahead Of The Fundamentals

SectorOil & Gas
CountryMiddle east

As the pandemic rages, so do oil prices, reaching levels not seen since January 2020, when the virus was still a gleam in the epidemiologists’ eyes. A variety of reasons have been given for this trend, including recovering demand and suppressed supply, the vaccine roll-out, and falling inventories. Indeed, the futures price has returned to backwardation, with the current contract nearly $1 higher than the 4th month contract, almost the same as early 2020. Which is a bit perverse, given that the fundamentals do not—at this point—seem to justify such prices, let alone backwardation. Backwardation, when current prices are above future prices, implies that the market is tight, which is why current contracts have a premium.

(Remember that futures prices are not predictions of the price in the future but what people are willing to pay today for barrels at a future date.)  The figure below shows the prompt (1st month) contract minus the fourth month contract, and for most of...read more...