Javier Blas is the FT's commodities editor
Bullish physical oil traders, who have been warning for months of a tightening market, have so far won the game against bearish macroeconomic hedge funds.
At first look, the price of West Texas Intermediate, the U.S. oil benchmark, has changed little. At around $91 a barrel, it is almost the same level it was in January. But the headline price is deceptive, masking a brutal and explosive shift in the shape of the price curve: for the first time since the start of the global financial crisis in September, 2008, the cost of WTI crude for immediate delivery is higher than forward contracts.
The downward slope of the price curve is known in the industry's jargon as "backwardation" and signals a tight supply and demand balance, while the opposite condition, which has prevailed for more than three years, is known as "contango".
The speed and magnitude of the shift into backwardation has left the oil market reeling. Trade volumes at Nymex, the New York-based exchange home of WTI, spiked on Monday to the highest level in nearly six months as macro hedge funds that were betting that an economic crisis would bring a deep contango exited their trades en masse.
The sudden move into backwardation on Monday, comes as U.S. crude oil inventories have dropped below the five-year average. Physical oil traders, who have warned for months that global oil supplies were running too low even when considering a weakening demand growth, have got it right. A year ago U.S. crude and oil products stocks were 70 million barrels above the five year average - enough to supply for a month a country such as Germany. By last week, the surplus had evaporated. U.S. stocks are now nearly 10 per cent lower than a year ago in spite of weakening economic growth.
On Monday, Nymex December WTI crude, the contract for immediate delivery, closed at $91.27 a barrel, above all the forwards contracts for delivery up to December, 2019. It is the first time in more than three years that the full price curve moves into backwardation.
The closely watched time-spread between the contract for immediate delivery and the one-year forward jumped into a backwardation of 75 cents per barrel on Monday, a huge contrast with a record contango of more than $23 a barrel set in January, 2009.
The shift in the oil curve so far this year is even more dramatic if compared to the lack of movement in the headline price - or flat price in the industry's jargon. In January, the WTI flat price was $91.55 a barrel, 0.3 per cent higher than the close of Monday. But the 1-12 month spread has shifted over the period from a contango of $3.28 a barrel in January to a backwardation of 75 cents on Monday, nearly a 160 per cent swing.
The WTI's shift into backwardation is the latest in a global process that started months ago. The drop in inventories kicked in Europe more than six months ago, pushing first Brent into backwardation in March after the loss of Libyan supplies; it moved later into Asia, pushing Dubai crude into backwardation too. It has now finally arrived in the U.S.
Now, three scenarios open up. Either the global economy slows down, bringing oil demand growth in line with constrained supply; oil production rises as the geopolitical situation improves in Libya and supply glitches in the North Sea, Angola, Nigeria, Azerbaijan and elsewhere end; or headline oil prices would shift higher to balance the market, tracking up the violent move from contango into backwardation.