⚡Backwardation is Gone

February 18, 2025

PRESENTED BY: EKT Interactive Oil & Gas Training

Morning,

All eyes are on news of any movement towards a peace deal between Russia and Ukraine. Sec of State Rubio has arrived in Saudi Arabia, and although the trip was planned earlier it has turned into a precursor to possible talks between Trump and Putin later this month.

There is little doubt that a peace deal will result in anything other than more hydrocarbons on the market - both oil and gas.

BofA was quoted in the WSJ as saying:

“We believe Brent crude oil prices could drop between $5 and $10 a barrel if Russian barrels suddenly do not need to make a long journey to India or China, and more supply is suddenly made available,”

All of this at a time where spreads in WTI contracts are indicating weakness in demand for crude.

~Doug​

What's in this issue:

• Energy Market Recap

• Is the Wait Over?

• Headlines

Energy Markets

🛢️Oil prices ended lower by .77% on Friday. At a glance, the -.37% weekly move seems uneventful, but prices were about $3 off the weekly highs.

This closing also made it four straight weeks of lower prices for WTI, and they are now lower than where they were when Biden announced sanctions on Russia’s shadow fleet.

As I’m writing this, prices have rebounded by about 1%.

This weekly chart shows that we’ve been in a $65-80 range for quite some time, and are now right in the middle of it.

Punt..

I did see a poll on linkedin where none of the respondents (very small response) thought oil would go below $70 in 2025. May be enough reason to get bearish!

WTI Spreads

Spreads continue to weaken in the front and closed last week just barely still in backwardation. Mar/Dec moved in from $3.10.

Mar/Apr: +0.03
Apr/May: +0.15
Mar/Dec: +2.59
Dec5/Dec6: +2.42

🔥Natural gas prices ended higher on Friday by 2.7%, making it up 12.5% for the week.

Cold weather, and the ensuing inventory declines, have dominated the narrative. That looks set to continue this week.

If there was any sign of weakness in this steady march higher it was the inability to hold near highs as well as selling off on the expected EIA data last Thursday. However, at the end of the day, the market put up positive closing prices every day last week.

Note that at the time of this writing, prices were down 3.25%, as shown by the red bar on the chart above. Also worth noting is that $3.80 has been a big technical level for this contract going back a couple of years.

Prices did touch $4.01 back in December.

Weekly chart below:

This chart of the continuous contract price also gives some perspective on the volatility lately:

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Is the Wait Over?

What to do, what to do…

When and how OPEC+ will unroll their current production cuts has been a question for some time. The group has largely been seen as stuck with their decision as oil prices continue in rangebound trade.

According to Reuters:

“OPEC+ is cutting output by 5.85 million barrels per day (bpd), equal to about 5.7% of global supply, agreed in a series of steps since 2022.”

In December, the group kicked the can down the road until April, and here we are again.

Despite the war in Ukraine, sanctions, Israel/Iran, Middle East tension, and potential tariff war, oil prices have been stubbornly tame. Start to remove those tensions and…

Can the Market Really Absorb More Barrels?

Oh ya, remember that the backwardation in the front WTI structure has all but disappeared.

The EIA has estimated that the expected oil supply overhang in 2025 has shrunk, but not disappeared, to about 450,000 barrels a day.

Russia’s Deputy Prime Minister Alexander Novak seems to think the market can handle it. He stated on Russian news that OPEC+ is not considering a delay to April’s supply increases.

We’ll just have to wait to see if any other ministers agree with him.

Headlines

“The boom could transform Argentina’s economy. Estimates suggest that the shale business could help create between a quarter and half a million jobs by the early 2030s. Widening the country’s trade surplus would replenish its meagre foreign-currency reserves, helping it pay its debts.”
+Javier Milei is betting big on an Argentine oil gusher - Economist

“But we’ve learned over the past five years that the West lacks the political will to stomach higher energy costs, and the Global South isn’t interested in supporting Washington, Brussels and London. The political appetite for strong sanctions is so feeble that even Japan, typically aligned with the US, only pays lip service to them.”
+The Black Market for Oil Will Continue to Thrive - Bloomberg

“European officials have been left stunned and flat-footed by the Trump administration's moves on Ukraine, Russia and European defence in recent days, and must now confront the reality of a future with less U.S. protection.”
+Europe talks up more defence spending as Ukraine peacekeeper plan divides - Reuters

Economic Calendar

Monday -
Tuesday -
Wednesday - Housing Starts, FOMC Minutes, Crude Oil Storage Report
Thursday - Natural Gas Storage Report, Jobless Claims,
Friday - Consumer Sentiment, Existing Home Sales