Backwardation Hints at Gains with OPEC JMMC on Tap

Crude Oil Fundamental Forecast: Bullish

Crude oil futures backwardation suggests that prices may climb higher in the near term. Accelerating vaccination rates and a marked decline in global Covid-19 cases could underpin oil prices. The upcoming OPEC JMMC meeting will be keenly eyed by investors.

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Futures Backwardation, Climbing Vaccination Rate Hints at Gains

The price of oil has remained resiliently poised above $52 a barrel as data points out of the US instilled an improved outlook for demand, with crude inventories falling 9.91M in the week ending January 22 versus forecasts for a 0.43M rise. At the same time, figures coming out of the Energy Information Administration (EIA) showed crude production narrowing to 10,900K after holding at 11,000K for five consecutive weeks.

These bullish supply-demand dynamics have seen the backwardation of the oil futures curve intensify in recent days. The spread between the March 2021 and March 2022 contracts has soared to its highest levels in over a year, which hints at strong-near term demand.

WTI Crude Oil Futures Curve

WTI Crude Futures Chart

WTI futures curve daily chart created using Tradingview

Moreover, with coronavirus vaccination rates notably climbing, and the 7-day moving average tracking global cases falling by over 200,000 since peaking at 741,784 on January 12, there is a distinct possibility that nations around the world will be able to start rolling back restrictive measures in the coming months. This could pave the way for a marked recovery in overall mobility and would probably propel oil prices even higher.

Looking ahead, the upcoming OPEC Joint Ministerial Monitoring Committee (JMMC) meeting will be keenly eyed by oil investors to determine the cartel’s approach to production in the near term. Secretary General Mohammad Barkindo insisted that the group “will continue to take a month-by-month approach to assessing market conditions” while speaking at the S&P Global Platts Americas Petroleum and Energy Conference.

Barkindo also reiterated that OPEC and its allies “stand ready to take any necessary actions” to soften the fallout from any potential deterioration in global fundamentals., suggesting that the cartel will continue to regulate the energy market in 2021. Therefore, crude oil could be poised to extend its recent gains if global coronavirus cases continue to decline and OPEC holds fire on reintroducing additional supply.

Vaccine Doses Administered

— Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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