The Arc of Crude’s Curve
What does the crude oil futures curve tell us and why is it important?
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(Note: There is an animated crude curve gif at the head of this post that may take a moment to render in your email or browser—a static non-gif version of this graphic is available below the summary bullets)
The price of a barrel of oil is one of the most important macroeconomic variables, but there is no one price; instead, the price of each barrel is determined by its chemistry, its location, and—the subject of this post—its place in time.
The crude futures curve provides valuable information about the current state of the spot market (historically tight!) and inventory economics, as well as useful risk management signals concerning changing market regimes (we’re still well off any curve inversion)
While the front of the curve is telling us that the market is near the tightest it’s ever been, the back of the curve is saying that “the market” is still doubting a true, durable return to the high price environment of pre-2014
Despite the utility of the curve, it’s important to understand that it isn’t a “consensus market forecast”, at least not at the front of the curve, and such an interpretation can be dangerous given that a superbackwardated market seems to be providing the most comfort at exactly the time when conditions are most concerningly tight.
In the end, the most valuable signal provided by the crude curve today is that spot markets remain exceptionally tight—albeit slightly looser than earlier this year—and that the risk of a pronounced price rout remains low.
Static version of headline gif above:
Oil is the world’s largest and most consequential commodity market, fueling the vast majority of the global economy’s essential locomotion. This makes the price of oil one of the most important macroeconomic variables—but, you see, there isn’t just one price of oil. Instead, the price of a given barrel of crude depends on its chemistry, its location, and—most importantly for this discussion—its place in time.
A barrel of oil can be bought or sold for immediate delivery (i.e., the spot market) or future delivery, next month or any number of months thereafter. The chained prices of sequential crude futures contracts form a curve (i.e., the futures curve), which exhibits a variety of attributes that help analysts get a near real-time sense for what’s happening in the often opaque global oil market.
But this critical indicator is often grievously misunderstood; many of the signals can be counterintuitive. Here’s how I think about the curve and what it is—and isn’t—telling us about this wild oil market in which we find ourselves today.