WTI just hit a $57 handle for the first time in over two months, with the biggest drop of the year, as extreme positioning is accelerating anxiety over both the demand and supply side of the energy markets.
But, with oil production plunging in Venezuela and Iran, tension in the Middle East at its highest point in years, and the threat of further outages in Libya, why are oil prices not trading higher?
Even price volatility has been rather low, a surprising feature of a tight market rife with geopolitical risk. Brent crude has been stuck between a relatively narrow range of $70 to $75 per barrel for more than a month, despite all the turmoil.
Furthermore, even the back end of the futures curve has barely budged, trading between $60 and $65 per barrel. At the same time, the front end of the curve has moved into steep backwardation – when near-term contracts trade at a premium to longer-dated futures. Backwardation is typically associated with a tight oil market – essentially, traders are willing to pay a premium for oil today relative to deliveries six or twelve months out.
What does all of this mean?
“The recent movements in the oil price complex indicate some deep dislocations between the physical and futures markets and in market expectations about current and future oil market fundamentals,” the Oxford Institute for Energy Studies (OIES) wrote in a new report.
Last year, the oil market saw