Term structure and vol point toward sustained WTI advance above $80
March 7, 2024
Key Observations:
The M1/M24 timespread in the NYM WTI crude oil forward curve averaged +15.3% last week. This is the strongest term structure in this futures market since the week ending Oct. 27, 2023. With the headwinds from a hot winter soon abating and the tailwinds from strong product exports and rising domestic gasoline demand already apparent, this crude market is primed for further strengthening in both term structure and flat price.
The M1/M24 spread had slipped to +4% as recently as mid-Dec. 2023, with loosening fundamentals threatening to extend prompt contango into more deferred contracts. At the time, we characterized the WTI situation as "tracing the bearish edge of a bullish regime".
However, the cash markets imposed price-driven curtailments to Midcontinent field capex and steered light ends into export streams. Firming structure is now occurring despite a rebound in the U.S. oil-directed rig count (506 from 497 two weeks ago), which is a confirmatory signal the barrels are wanted.
The prompt Apr-24 contract (CLJ4, $79.13) expires on Mar. 20. This instrument continues to be tugged to the downside by soft demand for heating fuels, especially propane. A flush into expiry, comparable to last year's CLJ3 expiry, is a risk, but would likely be brief if it occurred.
Source: NYM, Bloomberg, Blacklight Research. Note: rig count data are from Baker Hughes.
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