Oil Futures Market Tells Us Glut Is Over

According to consulting firm McKinsey, the current oil futures market is pointing to a coming balance between demand and supply – a balance which has the potential to render most oil and gas investments uneconomical.

The futures market is often a reliable guide to forcasting the future direction of oil prices, and analysts rely on both contangos or backwardation when determining their forecasts.

Until around 2005, backwardation was the normal condition, as seen in the charts. But since 2005, contango has become the normal condition, reports Reuters. Experts differ on their views regarding this shift.

Large contango is indicative of market bottoms. During the 2008-09 crude oil crash, the oil market witnessed a super-contango, when the price difference between the first month and the seventh month contract had reached up to $10 per barrel, Rakesh Upadhyay noted.

Similarly, during the current crisis, the contango reached $8 per barrel twice, once in February of 2015 and again in February of 2016, as shown in the chart below, after which, the markets bottomed out, Oilprice.com reports.