Illustration by Elias Stein
Even after oil prices surged this past week following a surprise OPEC production cut, oil traders don’t seem convinced prices will keep rising. In fact, oil futures seem to expect prices to retreat after the near-term price shock.
While the nearest-term Brent crude futures, the international benchmark, were up 6.6%, to $85.05 per barrel, on the week through Thursday, futures expiring in December 2023 rose 4.6%, to $81.50. The fact that December futures are trading at lower levels than today’s prices looks bearish: Why buy oil stocks if oil prices will fall by year end? But the current trading pattern, known as backwardation, has actually been a bullish signal in the past, and may point to more gains for oil prices and stocks. On Monday, the
Energy Select Sector SPDR
exchange-traded fund was up 3.9%.
Oil futures often trade in the opposite pattern, known as contango, where far-future prices trade at higher levels than in the near future.
Contango
looks more bullish than backwardation on its face—charts feature lines curving upward—but historically, it often hasn’t been. In a 2017 paper, Pimco portfolio managers Nicholas Johnson and Andrew DeWitt wrote that oil markets tended to rise 2.9% three months after they moved into backwardation, and fall 3.8% after they shifted into contango.
Backwardation encourages traders to buy oil because they can sell near-term contracts and buy cheaper future ones. It can also persuade oil producers to restrain output, because they won’t get paid as much. By limiting supply, as most producers have done over the past two years, oil prices should stay strong.
Write to Avi Salzman at [email protected]
Last Week
Job Jitters
Shares in Big Oil jumped on OPEC+ output reductions. Stocks fell after job openings slipped to 9.9 million in February, raising fears of a weakening labor market. Then stocks rallied as initial jobless claims came in higher than expected and new-job growth moderated a bit. Markets were closed on Good Friday, leaving the
Dow Jones Industrial Average
up 0.63%, to 33,485.29; the
S&P 500
down 0.10%, to 4105.02; and the
Nasdaq Composite
lost 1.1% to 12,087.96.
Oil Jolt
Oil prices surged after the surprise OPEC+ announcement that it would cut production by a million barrels a day. The decision may have been a response to a U.S. disclosure that it would not rapidly replenish its oil reserve. The U.S. called the OPEC+ move ill-advised, though President Biden downplayed its effect on inflation. Brent and West Texas Intermediate prices surged 8%, then fell back to 5%, then rose 6% more on Tuesday.
Booking Trump
Former President Trump was booked and arraigned in New York on Tuesday on 34 felony charges of falsifying financial records. He pleaded not guilty. Protests, pro and con, were small. Back at Mar-a-Lago, Trump attacked the judge and prosecutors. In Wisconsin, a Democrat, Janet Protasiewicz, easily won a closely watched state supreme court contest, tipping the court Democratic for the first time in 15 years. And the GOP-dominated Tennessee House expelled two Black Democrats over an antigun protest on the floor.
The Russian Front
U.S. Secretary of State Anthony Blinken urged his Russian counterpart, Sergei Lavrov, to release Wall Street Journal reporter Evan Gershkovich. The Financial Times reported that Russian security services had seized passports of senior officials to keep them from traveling abroad. A bomb in a statue killed a Russian military blogger in St. Petersburg. Finland joined NATO.
Yard Sale
The FDIC tapped
BlackRock
to sell its securities portfolio from failed Silicon Valley Bank and Signature Bank. The mostly mortgage-backed securities include $87 billion from
SVB
and $27 billion from Signature.
Annals of Deal Making
Swiss officials are probing
UBS
’ state-backed takeover of Credit Suisse… World Wrestling Entertainment agreed to be acquired by Ari Emanuel’s Endeavour Group, the parent of mixed martial-arts league United Fighting Championship. Endeavour will merge WWE and UFC and form a listed company with an enterprise value of $21.4 billion. It will hold 51% of the new company…Richard Branson’s
Virgin Orbit
filed for bankruptcy, after laying off 85% of its staff. The company saw a United Kingdom launch fail in January, and was unable to raise more financing…The Federal Trade Commission told genome sequencer
Illumina
to unwind its $8 billion deal for cancer-tester Grail…Johnson & Johnson proposed an $8.9 billion settlement to resolve lawsuits over whether its talcum powder caused cancer.
Write to Robert Teitelman at [email protected]
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