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Oil’s 440% surge looks like work in progress in a warped market

By Piero Cingari

Edited by Anil Varma

10:00, 19 October 2021

Image of financial chart against backdrop of an oil field
Oil prices rally – Photo: Shutterstock
  • Oil price forecast: Goldman Sachs sees $90, Bank of America predicts $100

  • Brent crude oil price has surged 440% from the lows reached in April 2020

  • An inverted oil-futures curve indicates demand is being front-loaded

After delivering a stunning 440% in returns since early 2020, what could crude oil possibly offer investors now? More of the same, according to some analysts.

Since plunging to pre-Y2K lows during last year’s pandemic-fuelled financial turmoil, crude oil has outperformed almost every other major asset class except cryptocurrencies -- living up to the fabled epithet of `black gold.'

Chart showing oil's outperformanceOil outperforms – Chart: Koyfin

Brent crude – the European benchmark – surged above $85 per barrel on Monday from as low as $16 in April 2020, when the onset of the coronavirus crisis sent global economies into shutdown and all but crushed demand for energy commodities.

So where is crude headed next? Can oil prices rise further, or will it decline from these levels?

Oil price forecast: will crude hit $100?

Analysts at Bank of America, who predicted in June that global oil prices could hit $100 in 2022, recently brought forward that call to say the level could be reached as early as the coming winter in the northern hemisphere as demand-supply gaps widen in energy markets.

Their counterparts at Goldman Sachs now expect Brent to peak at $90 by year-end, lifting their forecast from $80 earlier. In 2022, they see an average level of $80. ING Groep recently lifted its fourth-quarter average forecast to $77 from $70, but expects prices to modestly ease next year amid output increases from major producers

Last week, the US Energy Information Administration raised its forecast for average Brent cost in the fourth quarter by $10 per barrel to $81. The EIA sees the price declining to an average $72 next year amid an improvement in supply.

Brent crude has climbed to a three-year high while the WTI contract, the American benchmark, has hit levels unseen since 2014, driven up by repeated demand and supply shocks in recent months.

And at least for now, there’s no end in sight for the market stress.

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Backwardation in oil futures: it’s a topsy-turvy picture

Prices of crude-oil futures, agreements for buying or selling the commodity at a later date, suggest a persistent demand-supply deficit over the coming quarters. The spot contract is trading at a higher rate than longer-term maturities – an unusual market condition that’s known as backwardation, which underscores demand-supply mismatches and has been a bullish sign in the past for the commodities market

Chart showing rising spread between oil spot, futuresRising spread between oil spot, six-month futures – Chart image: TradingView

The premium on the spot oil price over the six-month futures contract has widened to the most since 2013. In normal circumstances, futures prices would be higher than spot levels, a situation known as contango, taking into account the cost of physical storage of a commodity over longer periods.


23.73 Price
+1.140% 1D Chg, %
Long position overnight fee -0.0090%
Short position overnight fee 0.0008%
Overnight fee time 21:00 (UTC)
Spread 0.020

Oil - Crude

73.28 Price
+0.920% 1D Chg, %
Long position overnight fee -0.0156%
Short position overnight fee -0.0063%
Overnight fee time 21:00 (UTC)
Spread 0.03


1,946.74 Price
+0.330% 1D Chg, %
Long position overnight fee -0.0090%
Short position overnight fee 0.0008%
Overnight fee time 21:00 (UTC)
Spread 0.30

Natural Gas

2.39 Price
+0.970% 1D Chg, %
Long position overnight fee -0.1603%
Short position overnight fee 0.1384%
Overnight fee time 21:00 (UTC)
Spread 0.005

However, since November 2020 the curve that plots oil prices out into the future has sloped downward, with the shortest maturities costing the most. This reflects the fact that buyers anxious to secure supplies are willing to pay a premium for the soonest deliveries to avoid shortages later.

Backwardation also provides opportunities for speculators, who look to pocket the so-called roll yield by selling short-dated contracts and buying far maturities at a cheaper price, taking advantage of the fact that futures prices eventually converge with spot levels. Over the past year, such market conditions led to a substantial outperformance of oil - and other energy commodities over other asset classes including equities.

Chart showing inverted oil futures curve`Backwardation' in oil futures curve

According to an analysis by PIMCO, the Bloomberg Commodity Index, which tracks 19 raw materials, produced an average return of 1.3% during 12-week periods that followed bouts of backwardation om the oil market. That compared with an average loss of 0.3% during similar stretches in contango markets.

What factors are shaping the oil market?

Several supply and demand shocks have played a role in driving up oil prices in recent weeks and months. These are

  • The decision this month by the OPEC+ group to boost production by just 400,000 barrels a day from November, despite requests for a more substantial increase from consuming countries
  • A temporary drop last month of about 700,000 barrels per day in US crude output due to the effects of Hurricane Ida, which slammed the American coast in early September
  • Energy-intensive industries switching to oil from natural gas and coal due to a jump in the prices of those fuels
  • A sustained decline in global oil reserves due to a persistent demand-supply gap

Oil demand versus supply: what’s the outlook?

The market saw demand collapse during the first wave of the Covid-19 crisis, but that trend reversed sharply since the third quarter of 2020. And while demand rebounded vigorously on the back of a global economic recovery, supply has failed to keep up – leading to a slump in oil inventories.

The oil market will continue to draw down inventories by about 2 million barrels per day for the rest of this year, before returning to surplus only in Q2 2022, according to the EIA’s October 2021 Short-Term Energy Outlook.

Chart showing EIA's oil demand, output projectionsEIA oil demand, output projections – Data: EIA

Demand could even intensify in the coming months, according to the International Energy Agency, leading to greater imbalances in the absence of supply adjustments. In its latest Oil Market Report, the IEA highlighted that the switch to oil caused by the ongoing energy crisis could increase crude demand by additional 500.000 barrels per day compared to normal circumstances

“An acute shortage of natural gas, LNG and coal supplies stemming from the gathering global economic recovery has sparked a precipitous run-up in prices for energy supplies and is triggering a massive switch to oil products.” – International Energy Agency, October 2021.

Energy commodities outperform most other assets

Over the past 12 months, energy commodities have outperformed every other asset class. With the exception of cryptocurrencies. Natural gas and oil prices have more than doubled from a year ago, while coal clocked an astonishing 344% return thanks to a power crisis in China.

Stock-market returns pale in comparison, with the S&P500 of US equities delivering a one-year performance of 27% and the NASDAQ gaining 22%.

Markets in this article

Oil - Brent
Brent Oil
77.59 USD
0.72 +0.940%
US 500
4268.1 USD
0.9 +0.020%
Oil - Crude
Crude Oil
73.28 USD
0.67 +0.920%
Natural Gas
Natural Gas
2.394 USD
0.023 +0.970%
US Tech 100
14296.6 USD
4.6 +0.030%

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