EIA explains steep backwardation of WTI futures curve

Over the past 6 months, the front month price of West Texas Intermediate oil futures has been pushed up relative to later months, leading to a steepened backwardation of the WTI futures curve.

Over the past 6 months, the front month price of West Texas Intermediate oil futures has been pushed up relative to later months, leading to a steepened backwardation of the WTI futures curve. Backwardation is the market condition where prices of contracts with later delivery dates are trading below prices for near-term contracts.

According to the US Energy Information Administration, the current steep backwardation can be attributed to several factors:

• The price of the front-month contract has been driven up by recent geopolitical events, supply disruptions, and high seasonal refinery demand.

• Market participants expect some bottlenecks of pipeline infrastructure to transport oil out of Cushing, Okla., to persist, which contributes to lower WTI futures prices and drawing from inventories that reached record highs last year.

• According to EIA’s latest Short-Term Energy Outlook, total US crude oil production will average 8.4 million b/d in 2014 compared with 6.5 million b/d in 2012. Market expectations are that US oil production will increase in future years, which contribute to downward pressure on the WTI price.

“The fact that the market is backwardated reflects the market’s anticipation that most of the recent international geopolitical factors will be temporary. The market expects the longer term fundamental production and transportation issues described above to remain, which contributes to lower WTI prices,” EIA said.

Contact Conglin Xu at conglinx@ogjonline.com.

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