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Last week I wrote that the the oil price rally was ending.  To some it may look like a price collapse now. I don’t think so but the price rally is clearly over for a while.

Today, WTI futures price fell -$2.80 (-5%) and Brent fell -$1.45 (-2%). The spreads, however, are revealing.

The WTI 12-month spread fell -$0.92 from $3.65 last Thursday to $2.73 today (Figure 1). That’s a -25% drop in one business day. The spread has fallen -$1.89 (-41%) since March 29. It has decreased -$3.77 since March 5. That’s the biggest drop since prices began to collapse in early 2020.

Front-month price moved to its lowest level in more than 2 months at $58.65. The forward curve is in prompt-month contango and its term structure is flatter than it’s been for weeks (Figure 2). At the same time, it doesn’t look like a collapse in this context, at least not yet.

Brent 12-month spreads reversed today from the lowest level since January last week. The spread increased +$0.48 from $2.42 to $2.90 on Monday, April 5 (Figure 3). That looks less dire than WTI spreads..

Both WTI and Brent prices are about +$0.60 to $0.70 higher in early trading as I write at 10:00 p.m. Houston time. I don’t think prices are collapsing but it is improbable that they will regain March highs any time soon.

The rally was over a few weeks ago but until late last week, there was hope it might resume its upward momentum. That seems unlikely for now. I doubt that the Saudi oil minister is feeling too good about OPEC+’s  decision last week to increase output and his decision to raise Asian prices.

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Monthly oil prices have nearly quadrupled since April 2020 and that has some analysts talking about an oil super-cycle. That seems somewhere between premature and stupid at least for oil.

We’re near the end of a price increase that began at less than zero back to the where prices were before the pandemic. That’s a recovery not a rally.

Commodity super-cycles are caused by transformational periods of economic development and massive capital investment. They are characterized by demand growth and high commodity prices that may last for years.

Figure 1 shows world crude oil and condensate supply and price from 2000 to the present.

An oil super-cycle began in about 2003 and ended in 2014. It was caused by a plateau in oil supply in the face of rapid economic growth in developing countries like China, Russia, Brazil and India.

High oil prices resulted in development of tight oil, and renewed exploitation of oil sands and deep-water objectives. An additional 10 mmb/d of supply were added after 2010. Prices collapsed from over-supply in 2014 ending the super-cycle.

The present oil supply situation could not be more different than in the early 2000s. World output today is low because there is too much supply for existing demand. It is low because OPEC+ is withholding 8 to 10 mmb/d. It is artificial. Global debt and unemployment have never been higher. This is not the stuff of super-cycles.

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