Crude Oil Forecast: Headlines Hit Prices but Oil is Structurally Underpinned For Now

March 20, 2022

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CRUDE OIL, US DOLLAR, WTI, BRENT, BACKWARDATION, VOLATILITY, OVX – TALKING POINTS

Crude oil prices ripped through levels amid ferocious moves this week
War headlines hit prices but there are hints of underlying drivers of demand
Uncertainty is the only certainty amid chaotic price action. Where to for WTI?

Crude Oil Forecast: The Crude oil outlook remains obscured behind an opaque fundamental backdrop with headlines and
positioning driving unhinged price moves.

Sanctions on Russian oil supply continue to create unknown consequences. The International Energy
Agency (IEA) reported this week that up to a third of Russian oil exports are at risk in April.

8 million barrels per day (bpd) were exported in January and the IEA see 2.5 million bpd of oil and
crude oil at risk for next month.

Meanwhile, a number of OPEC exporting nation have indicated that the cartel should ramp up
production to alleviate supply issues, with Libya joining the chorus this week.

While the supply side grapples with avoiding demand destruction, some structural features of the oil
market might have some clues, namely backwardation and volatility.

Backwardation remains in play in the oil market, indicating that further easing of prices to below pre-
war levels may not appear likely in the near term.

Crude Oil Forecast:

Crude Oil Forecast: Backwardation is when the contract closest to settlement is more expensive than contract that is
settling after the first one. It highlights a willingness by the market to pay more to have immediate
delivery, rather than having to wait.

The average level of backwardation for 2021 was US$ 0.58 bbl and after the recent peak at US$ 5.30
bbl, it is currently sitting above US$ 2 bbl.

June 2018 saw a significant spike in backwardation that coincided with rising prices. It wasn’t until 3
months after backwardation settled down that the price eased off. If similar circumstances were to
unfold today, it might be a while before oil prices get back to levels under US$ 85 bbl.

With the narrative around developments from Ukraine dramatically impacting oil prices, it is hard to see
volatility for crude settling down anytime soon. A measure of volatility on the Chicago Board Options
Exchange (CBOE) shows that vol could easily spike higher. While it is currently elevated, it remains
below previous episodes of wild price swings.

While the price has whipsawed through this week, volatility has potential on the upside for next week.
Until we see backwardation go lower, prices could see buyers on the dips.