Oil Slumps With Bearish Market Structure Flashing Weak Demand

Brent futures slumped 3.4%. The nearest contract traded at a discount to the next one for the first time since January — a pattern known as contango that indicates oversupply — after a precipitous selloff in recent days. The dollar also climbed, making commodities priced in the currency more expensive. An advance in U.S. Treasuries also showed haven buying in broader markets as risk appetite wanes.

There are concerns over the demand outlook. Covid-19 cases are surging in India and threatening the economy’s recovery from a rare recession, while Germany will extend its curbs and impose an Easter lockdown. In the U.S., New York City’s mayor urged a pause on reopening.

While oil started the year strongly, that rally has cooled on concerns about the health of the market in the short-term as the coronavirus surges again in parts of the world. OPEC+, which is holding on to output cuts in an attempt to buoy prices, could remain cautious about future supply increase when it meets next week.

“Extended lockdowns and risk of new ones is not what the market needed to hear,” said Ole Hansen, head of commodities strategy at Saxo Bank. “Brent back in contango is highlighting not only speculative selling but also the virus’s continued unpredictable impact on demand.”

The weakness in the nearest part of the futures curve comes as stockpiles built up last year are being unwound from storage, according to consultant Energy Aspects. The contango structure is unlikely to last because the removal of oil from inventories is part of the market’s ongoing re-balancing, the consultant said.

U.S. crude stockpiles, meanwhile, probably expanded by 1.2 million barrels last week, according to the median estimate in a Bloomberg survey. If confirmed by government data on Wednesday, it would be a fifth weekly increase, the longest run of gains since May.

Inventories have ballooned after the cold snap last month shut several refineries, some of which are still attempting to restart.