The global oil market is signaling a potential shift, as traders and analysts worry about reduced crude demand and an oversupplied market in the coming months.
After months of strength, crude futures are flirting with lows not seen all year as top oil consumer China enters additional COVID-19 lockdowns while central banks hike interest rates to combat inflation.
Front-month global oil prices in the last week have traded weaker than future-dated contracts, while prices for physical crude grades throughout the world have declined, market participants said.
"Differentials are confirming what outright prices have been implying – there is a demand deficit and/or supply surplus," said Tamas Varga of oil broker PVM.
The murkier environment comes at a fraught time for the market. On Dec. 5, a European Union ban on Russian crude imports is set to start, along with a plan by the G7 nations to force shippers to comply with a price cap on Russian oil sales.
Meanwhile, OPEC+ - the grouping of the Organization of the Petroleum Exporting Countries (OPEC) and allied producers including Russia - is set to meet to consider output levels on Dec. 4.
The changes are evident in the market's structure - a comparison of near-term versus longer-dated contracts. In the last week, crude futures contracts have flipped in and out of contango, where the prompt price of a commodity is lower than the future price, which suggests short-term weakness.
The front-month U.S. crude futures contract traded as low as 38 cents weaker than the second-month contract , the weakest differential since November 2020, Refinitiv Eikon data showed. The front-month contract for the Brent international benchmark traded as low as 6 cents below the second-month , the weakest since August.
The inter-month spread for December and January Dubai swap flipped into contango last week for the first time in one and half years.
