Well, that will get everyone’s attention, at least for now. Should something happen to the crude oil rocketship, there goes inflation. A day after the FOMC releases substantial upward revisions to inflation rates its models now project for this year, the NYMEX pits jump all over them with oil’s worst day since just after last April’s negative price turmoil.

Before we venture into the “why”, let’s start with “what.”



The front month WTI futures contract plummeted by just under 8%, dropping back below $60 per barrel from just about $66 a week ago. What’s important about this isn’t the scale of the decline nor the speed with which it came about, as usual the interesting part is how the futures curve twisted while all that happened.

Over the last several days, a small bit of contango has reappeared between the front and second month contracts. By itself, nothing alarming, though the possibility it could be the first sign of a shift in market positioning is being dangled in front of us; twisting typically starts up front.


Going back to when the inflation frenzy began in January, the entire curve had left contango behind in the 2020 doldrums easily entering backwardation. The 3-month calendar spread (a good measure of market conditions between liquid contracts with enough short run time in between them) had actually peaked in its downward sloping shape back on February 25; a substantial and relatively optimistic $1.46 in between the two prices on that day.

While the nominal price level had increased across the curve until March 11, by then this 3-month spread had already dipped back below $1 to just 91 cents. Now, as the WTI curve comes back down, the backwardation spread is just 29 cents today – the lowest since mid-January.



These things altogether aren’t necessarily (see: October 2019) abnormal, they do happen from time to time. Even such a large price drop, or a large single-day crash happening during a time when the curve shifts dramatically flatter, it’s not unheard of by any means and historically it doesn’t always lead to a regime change in crude (and then everything else, since crude is a leading indicator).

But regime change does happen during those other times, too (see: February 2020; October 2018) which means this could possibly be the first step toward retreat, then worrisome contango. Or it might be nothing.

If the former, the reasons why are pretty plain and obvious; Uncle Sam’s helicopter or not, the oil market just can’t shake substantial headwinds on the demand side. The supply side, that’s easy (it’s always easy, going back to the “supply glut” days of Euro$ #3 that was nothing to do with supply); producers continue to sit on production, already raising serious questions/suspicions as to what they think of the market’s love affair with black gold the past few months.




Because with massive, ongoing supply cuts (that have now lasted an entire year!) inventory remains a serious problem anyway. Domestic crude stocks have certainly been mixed up due to February’s frozen storm, which also shut down refineries on the Gulf Coast for lack of power. The net result: a huge bulge in domestic crude inventor while gasoline stocks were drawn down.

But while some of the crude glut might be explained since it couldn’t move to be refined and therefore become gasoline, there are emerging signs there’s more to it.



For one thing, demand for gasoline as well as other types of finished products has not made up lost ground; raising the possibility of permanent loss. In terms of gas alone, demand has rebounded from lows in February – but that’s just seasonality since demand always starts to rise at this time of year (above). The latest weekly data from the US EIA figures that the amount of gasoline supplied was off by an enormous 13% when compared to the same week in March 2020 – the very one as the COVID panic descended upon the nation.

What’s beginning to emerge are several reasons why the futures curve has taken on these noteworthy proportions; serious questions remain about the feasibility of physical rebalancing in the wake of continuous low end user demand across all products even as supply is suppressed by equally astonishing levels. For an entire year, supply has been held way below its prior peak only to realize – at best – a precariously balanced domestic inventory situation.

The risks of it unbalancing unfavorably aren’t trivial – especially given what was supposed to have put the physical situation back on the right path. Stimulus. Feds. Maybe even whatever’s left of what anyone might care of the Fed’s contributions.

In the wake of the last helicopter, the $600, it certainly drove commodity prices like oil vertical, along with the Biden promise of much more, but the previous one like the one before that didn’t really leave much of an economic imprint beyond (even retail sales are all sorts of questionable). Will another $1400 be guaranteed to accomplish what the other two helicopters didn’t? Raise the stakes a little?

Again, serious questions.



As are potentially emerging difficulties in places like Europe where vaccine rollout has been an utter debacle, and noises about new COVID strains/outbreaks (leading to the inevitable political freakout) have grown in recent weeks. In other words, given the physical situation in global not just domestic oil, in many ways the 45-degree ascent has been priced to perfection, requiring all these factors to come together in just the right way without much margin for error.

Other people might include rising bond yields (and the SLR cliff) as a possible killer, and they are welcome to do so, but I personally doubt 1.75% 10-year Treasuries is the stuff of recovery termination; selloff in the long end, to me, is still quite of reflationary.

Short end, that’s another story though one which aligns quite a bit with newfound contango.

If the WTI curve is actually moving in that direction rather than a short-term profit-taking correction, then it’s more likely because the margin for error had been set up for little or no margin at all. A highly complex and fluid situation fraught with tremendous difficulties (and that’s just China). Given the importance of these factors, not just for CPI numbers, it’s worth serious and constant scrutiny.

OK, NYMEX, you’ve got our attention.