Oil Sells off on Demand Weakness

Written By Christian DeHaemer

Updated May 15, 2024

There are riots in China, economic weakness in Europe, and demand destruction in South America.

The theme of the oil market is changing. Futures are pointing to weakening global demand and a surplus of supply. This is a dramatic change from the idea that on December 5 an oil embargo on Russia will leave the EU out in the cold.

The market is always correct in the moment, but we make our money on the future. Over the last month, the price of oil has fallen. As I write this, the price of WTI is at $76.96 a barrel. Furthermore, the futures market is flirting with contango as opposed to the backwardations we’ve seen for the past few months.

Wikipedia describes contango as follows:

Contango is a situation where the futures price of a commodity is higher than the expected spot price of the contract at maturity. In a contango situation, arbitrageurs or speculators are "willing to pay more [now] for a commodity [to be received] at some point in the future than the actual expected price of the commodity [at that future point]."

You may find this perplexing. Why, Hammer, you may ask, would someone pay more later for something they can have cheaper today?

Well, I'll tell you.

There is a good chance that the price of oil will rise in late February when a Siberian cold front coincides with Germany draining its oil storage and Russia decides not to sell to anyone who instituted the price cap.

In such a situation, you might rent an oil tanker and fill it up with $76/bbl oil today with the idea you will sell it at $125/bbl in three months. The time to buy summer hats is at Christmas and all that.

Germany’s storage is currently at 100%, but its storage is only 20% of what it needs this winter. It will need to import oil and natural gas. The colder it gets, the more the country will need, and the government has already warned about rationing heating fuel.

The Price of COVID in China

One major question overhanging the price of oil is China. There are restricted movements in as many as 50 cities. And if one can trust social media, there are as many active protests against these COVID lockdowns. If China doesn't reopen its economy, it will be a drag on oil demand.

Others have speculated that the China protests are a gambit in which President Xi Jinping will declare that the people have spoken, end all restrictions, and then blame those very same people if the death count rips higher. Either way, things are coming to a head. But one thing I think I know is that it's going to be a cold winter.

Most Snow Cover in 55 Years

The National Oceanic and Atmospheric Administration recently put out a note saying that so far this year, the Northern Hemisphere has the most snow cover it's had since 1967.

This is important because snow reflects sunlight and heat. The more snow on the ground, the more light is reflected, and the colder winter becomes.

Severe Weather Europe notes:

Snow extent in the Northern Hemisphere at the end of November represents an important parameter for the early winter forecast. This year's snow extent is running much higher than average and according to existing global estimates, it is now beyond the highest ever observed so far. Winter forecast, especially in its early phase and in Europe, might be strongly influenced by such a large snow extent.

In other words, it looks like we are heading into a long, cold winter. The Chinese lockdowns are priced in, and global demand will increase. You might consider buying the dip in oil.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.

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