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Oil outlook: Backwardation is back. WTI to break $100 on tight supply?

By Piero Cingari

10:06, 10 October 2022

Oil pump silhouette working over counted 100 dollar banknotes.
Oil pump working over counted 100 dollar banknotes – Photo: Shutterstock

Oil market tightness is back after crude prices soared 13% last week as OPEC+ announced a strong cut of 2mln barrels a day and US Strategic Petroleum Reserves (SPR) fell to their lowest level since July 1984.

Both Brent and WTI curves are once again strongly backwardated, with spot prices or front-end contracts trading significantly higher than 6-month or 1-year futures. Backwardation signals supply shortages in the physical oil market.

It looks like a movie that was already seen between the end of 2021 and the beginning of 2022, when a physical supply shortage caused by the pandemic legacy was further exacerbated by the outbreak of the war in Ukraine, sending crude prices to the roof.

Rising oil prices are likely to rekindle inflation expectations, as explained here, and, as a result, Fed rate hike pressures at a time when price increases in energy commodities have only recently begun to moderate.

Resilient demand, supported by a robust US labour market, and declining supply as a result of OPEC+ cuts and depleted stocks are expected to push the oil market back under pressure in the coming months.

Is everything in place for oil prices to breach the $100-per-barrel mark again?

Oil backwardation is back: Price premium in front-end contracts rise

Backwardation in crude market, as measured by spot vs 6-month price spread – Photo:, Source: Tradingview

Under normal market conditions, future prices of a commodity should trade higher than the spot price, as the global economy expands and thus more growth means more future demand.

Right now, we are seeing the opposite situation in the oil market. Spot prices are trading at a strong premium compared to longer-term future deliveries.

Intermonth price spreads in the WTI and Brent futures markets are widening again. On Friday, October 7, WTI spot traded at $8.16 a barrel premium versus WTI 6-month futures, the highest spread since the end of July. The spread between spot Brent and 6-month Brent futures increased to $9.13.

This condition is known as backwardation, and it occurs when there is strong demand but insufficient prompt supply, resulting in market tightness.

Oil backwardation is rising as a result of OPEC+'s stronger-than-anticipated production cut and as US oil strategic reserves plummet to their lowest level since 1983, indicating that the wildcard to counter OPEC+'s cuts has already been taken out of the deck.

Backwardation will widen in the coming months the tighter the oil market becomes.

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Oil to exceed $100 as demand rise amid low supply and depleted stocks?

World liquid fuels consumption is expected to rise by 2mln barrel a day in 2023 – Photo: EIA, Short-Term Energy Outlook

The oil demand remains strong, while the supply from OPEC+ is shrinking and Western oil stocks look vulnerable.

Oil - Brent

85.25 Price
-0.090% 1D Chg, %
Long position overnight fee 0.0234%
Short position overnight fee -0.0453%
Overnight fee time 21:00 (UTC)
Spread 0.045

Natural Gas

2.92 Price
-0.440% 1D Chg, %
Long position overnight fee 0.0113%
Short position overnight fee -0.0332%
Overnight fee time 21:00 (UTC)
Spread 0.0050

Oil - Crude

81.56 Price
-0.130% 1D Chg, %
Long position overnight fee 0.0157%
Short position overnight fee -0.0377%
Overnight fee time 21:00 (UTC)
Spread 0.030


29.51 Price
-0.280% 1D Chg, %
Long position overnight fee -0.0197%
Short position overnight fee 0.0115%
Overnight fee time 21:00 (UTC)
Spread 0.040

A robust employment report in September allayed fears of a US recession and quelled worries about a slowdown in oil demand. In September, the US added 265k non-farm jobs, which was more than the 250k expected, and the unemployment rate went down to 3.5%. 

According to the most recent EIA short-term energy outlook, global liquid fuel consumption is expected to rise by 2 million barrels per day in 2023, reaching an overall 102 million barrels per day.

This comes at a time when OECD oil reserves are running at extremely low levels. The US Strategic Petroleum Reserves (SPR) stood at 416,389 thousand barrels at the end of September 2022, the lowest level since July 1984 and equivalent to only 21 days of domestic oil consumption.

US SPR chart – Photo: EIA, Short-Term Energy Outlook
OECD oil stocks are equivalent to just 61 days of consumption – Photo: EIA, Short-Term Energy Outlook

U.S. influence over oil prices is dwindling as the window for releasing additional oil reserves closes, and Fed rate hikes are no longer producing the same downward pressure they did in the summer.

Oil prices could rise above $100 per barrel in the coming weeks as the physical market enters deficit conditions.

A backwardation in the spot vs 6-month price spread above $10 per barrel would be an effective signal for anticipating oil price spikes.

WTI price: levels to watch

WTI oil technical analysis, daily chart as of October 10, 2022 – Photo:

Last week, WTI prices smashed a triple resistance at $87, represented by the bearish trendline from the June highs, the 50-day moving average, and the 23.6% Fibonacci retracement (2022 low-high). 

The latest price action might actually a bullish breakout which, if confirmed this week, will likely lead to a reversal of the downward trend.

If short-term bullish momentum keeps going, the next big hurdles for WTI are at $95.5 (38.2% Fibonacci) and then soon after at $96.7. (August highs and 200-dma).

Breaking through these two levels may pave the way for a test at the psychological level of $100 per barrel, thereby completing a 50% retracement of the 2022 low-high range. On the downside, $88 (23.6% Fibonacci) already offers substantial support, and this is the area where bull dip buyers might reappear. 


Markets in this article

Oil - Brent
Brent Oil
85.248 USD
-0.073 -0.090%
Oil - Crude
Crude Oil
81.563 USD
-0.106 -0.130%

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