What the curves are saying
The degree of backwardation or contango in oil and gas markets provides important clues about where prices might be heading in the short-to-medium term. (Microsoft)
Although prompt oil prices fell by around 60% before bottoming out in January, the drop at the back end of the forward curve has been much smaller. For example, United States light sweet crude oil futures saw the first contract month settlement price drop from a 2014 peak of around $107.50 per barrel in June to $44.45/bbl in January this year – a 58% plunge. In contrast, the January 2020 contract has dropped from around $78/bbl a year ago to around $69/bbl, a drop of 11.5%.
This reflects the movement of the market from backwardation (when prompt oil costs more than that for delivery at a later date) to contango (when prompt oil costs less than that for delivery at a later date). A year ago, the March 2015-January 2020 WTI futures strip reflected an average backwardation of $0.37 per month; it now reflects a contango of $0.33 per month.