Crude Oil Price Whipped Around on OPEC+ Production Speculation. Where to for WTI?

Crude Oil, OPEC+, Saudi Arabia, Contango, Backwardation, Volatility, China – Talking Points

• Crude oil prices responded sharply to supply conjecture
• Futures markets might provide hints for WTI direction
• China’s economic outlook continues to battle disruptive restrictions

Crude oil collapsed around US$ 5 to a 10-month low on Monday before rallying back to where it started the week.

The wild ride was triggered by a Wall Street Journal article that said OPEC+ is considering an increase in production of 500,000 barrels per day at their gathering next week. Saudi Arabia later denied the report, and this saw the price roar back toward opening levels.

Fractures started to appear in the oil market last Friday when the futures market dipped into contango for the first time since May 2021. Contango is an indication of underlying supply and demand dynamics within the oil market.

It occurs when the contract closest to settlement is cheaper than the contract that is settling after the first one. It highlights a lack of appetite by the market to pay more to have immediate delivery, indicating that participants are potentially prepared to wait.

Both episodes of contango saw the market move back into backwardation to end the session on Friday and Monday.

Contango is the opposite of backwardation, which occurs when the 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.

Backwardation has been a feature of the oil market since early 2021 after the stimulus measures to deal with the pandemic started to kick in. This dunk into contango could be saying something about the broader global macroeconomic environment.

The swing in prices saw volatility tick up a notch but it remains relatively contained.

The backdrop for crude has also been hindered by a surge in Covid-19 cases in China that has raised fears of a return to harsh restrictions after 3 deaths in Beijing over the weekend. Chongqing, Guangzhou and Shijiazhuang, all significant Chinese cities, are facing increased lockdowns.

WTI CRUDE OIL, BACKWARDATION/CONTANGO, OIL VOLATILITY

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter