Crude Contradictions Therefore Uncertainty And Big Volatility

But what really caught my attention was the flattening WTI futures curve. Up in the liquid front, it was closing in on contango and had it achieved that reshaping it would have been, the point of my article, a key warning sign of more widescale deterioration.

Markets can truly make you look dumb in the short run (just last week we did a special podcast on stablecoins as a concept, only for Terra/Luna to blow up right after it was released). The long run, too, if you’re not careful (see: dollar).

While the crude market may have gone the other way, it’s also been noticeable for how much less certainty there has been in that other way dating back to the big oil spike which arrived late in February.

To oversimplify only a touch, it’s become a tug-of-war between two competing perceptions of the near-term future (I know, isn’t that every market?) On the Oil4Eva side, there’s the ongoing, persistent, doesn’t-look-like-it-will-ever-end supply restraint. No matter how high crude gets propelled, supply has barely budged off its 2020 bottom.

I covered this before, as well as the reason why this has been the case (it’s not actually political, rather mistrust of the Federal Reserve).

Half of large producers, along with slightly more than a quarter of small producers, tell the Fed branch they’re expecting no more than a paltry 5% additional production.

They’ve seen this movie before, refusing to allow big, public producers to commit huge chunks of capital on new production ventures only to have the rug yanked out from underneath everyone for what investors clearly believe will be a third time.

Pulling oil toward the downside, or at least keeping it from achieving 2008-levels of pain, there absolutely are any number of reasons to be far less sanguine about the demand side of the crude and macro situation.

Financial markets have been blaring warnings one after another, alarms that have only gained decibels over time. Curves have been joined by industrial commodities more recently and, most strikingly, the rampaging dollar now wrecking everything including China.

Total oil demand (product supplied, as it is called) went from a high in January and February down closer to the bottom of recent yearly ranges right around the time I had flagged the futures curve.

Gasoline demand, finished product supplied, actually has trended down to the lowest levels (for their time of year) outside of 2020.

There’s visible demand destruction in these results, which correspond directly to that last oil/gas price surge.

The fly in the ointment would be, if there is to be one, maybe two, first, further potential for demand to fall even more than it has; the downside team in the tug-of-war getting a boost by markets outside of oil growing more bearish than they are, in addition to more negatives in economic accounts like GDP or labor data (CPS).

Aiming, of course, for higher levels of output expansion beyond 2022.

Will that be enough to tip the supply dynamic at the margins? Perhaps, perhaps not. The difference, though, this little bit of additional supply, might turn out to be more decisive should demand falter more than it has – creating a tense, fragile market spilling over with months of volatility.

Uncertainty isn’t quite off the charts, though it is more than at any time in years. Big questions, big imbalances, and poor Jay Powell forced into the role of last-minute savior if necessary (not a good one for a janitor).

Who knows, the market could eventually turn toward contango again…even if only to give me another opportunity to repeat April 11.