MacroVoices #484 Rory Johnston: Crude Oil Forward Curve Conundrum

Episode Summary

Executive Summary: Macro Voices Episode 484 centered on Rory Johnston’s take on crude oil’s highly unusual term structure: a steep front-end backwardation flipping to broad contango farther out, a shape neither he nor Eric can confidently explain. They debated bearish paper fundamentals versus still-tight physical markets, the role of OPEC+, China inventory building, weak U.S. shale growth, and geopolitical escalation that quickly lifted prices.

Main Topics: Unprecedented crude oil forward curve shape (Priority: 5/5): Rory and Eric focus on Brent/WTI term structure that turns from steep backwardation near the front into contango farther out, especially around early 2026. Both see it as historically unusual and difficult to reconcile with known fundamentals. Physical market tightness vs bearish paper balances (Priority: 5/5): Despite forecasts and headlines implying looser supply, prompt crude remains tight, inventories are not behaving as expected, and front-end backwardation persists. The conversation emphasizes the disconnect between paper signals and physical flows. OPEC+ supply unwind and under-delivery risk (Priority: 4/5): They discuss how OPEC+ is unwinding cuts faster than expected on paper, but actual exports/production increases have not fully materialized. Saudi Arabia, Russia, and the UAE are seen as the main potential sources of additional barrels, but responses may be constrained. China as an inventory and demand wildcard (Priority: 4/5): China’s oil demand has become volatile year-to-year and month-to-month, while satellite data suggest inventories are building faster than normal. This may explain some prompt tightness and complicates simple bearish interpretations. U.S. shale slowdown and EIA forecast turn (Priority: 4/5): The EIA now forecasts U.S. crude production growth may roll over, tied to lower prices and a rapidly falling rig count. Rory argues shale’s slowdown is economically driven rather than a near-term geological ceiling. Technical views across risk assets (Priority: 3/5): The post-game segment covers overbought U.S. equities near resistance, a weak dollar trend with possible bounce, an oil squeeze off technical accumulation, bullish gold/precious metals breadth, uranium’s inflection point, and higher-yield pressure in Treasuries. Heavy crude and blendstock tightness (Priority: 3/5): The discussion closes on the tight heavy sour crude market, strong WCS differentials, refinery feedstock constraints, and shifting Canadian crude flows toward Asia, which may reflect structural changes in global heavy oil demand.

Key Arguments: The WTI/Brent forward curve is in a highly unusual state: steep backwardation at the front but contango farther out, and the transition seems to be occurring in the wrong part of the curve. Bearish headline narratives and OPEC+ production announcements imply softness, but physical crude markets have not loosened as much as expected. A likely explanation for prompt tightness is stronger-than-usual Chinese inventory building, which may be absorbing barrels that the curve suggests should be flowing into storage or the market. OPEC+ members appear to be returning barrels more slowly or less fully than advertised; Russia and the UAE may be structurally constrained, while Saudi Arabia remains the key swing producer. China’s demand growth has become unusually unstable, swinging from strong growth to flat or negative, making balance forecasts harder to trust. The EIA’s 2026 demand decline forecast is notable because U.S. shale, historically the market’s key supply-growth engine, may now be flattening due to low prices and falling rig counts. Rory argues shale is not 'played out' geologically; if prices returned to $100, U.S. output would likely respond strongly, so the slowdown is primarily economic. Non-OPEC non-U.S. supply growth from Canada, Brazil, and Guyana is slower and stickier, but still insufficient to offset weak demand growth if OPEC barrels return. The current term structure cannot persist indefinitely; either the front end weakens into contango or the belly/back end re-prices to restore a more normal curve. In equities, Patrick sees the S&P 500 as short-term overbought and likely due for a 5% pullback, though such dips may be bought. The dollar remains in a structural downtrend, but an oversold bounce is plausible before any deeper leg lower. Gold and broader precious metals remain bullish, supported by rising participation in silver, platinum, and palladium. Uranium equities have run ahead of spot prices; a real move in spot uranium would validate the rally and likely accelerate it. The heavy sour crude market is extremely tight, with WCS and related differentials indicating scarcity of blendstock for refineries. Canadian crude exports are diversifying toward Asia, especially China, which may gradually reshape North American heavy crude trade flows.

Data Points: SP 500: 6,022 - Week-over-week market scoreboard as of the close of Wednesday, June 11, 2025; up 87 bps. S&P 500 weekly change: +87 bps - Macro scoreboard move for the week. US dollar index: 9,858 - Week-over-week market scoreboard as of June 11, 2025; down 23 bps. US dollar index weekly change: -23 bps - Weak price action, testing yearly lows. July WTI crude: 68.15 - Up 843 bps on geopolitical escalation. July RBOB gasoline: 2.16 - Up 640 bps week over week. August gold: 3,343 - Down 165 bps week over week. July copper: 481 - Down 143 bps week over week. Uranium: 70 - Down 141 bps week over week on the scoreboard. US 10-year Treasury yield: 4.40% - Up 5 bps week over week. Brent front-end backwardation: about $0.75/bbl - Rory says prompt Brent backwardation is around 75 cents and now extends through roughly the first six contracts. Managed money net position in Brent and WTI: 5.5% of total open interest - Speculative positioning has recovered from early April lows but remains below early January levels. Managed money net position at early April low: 3.4% of total open interest - Positioning at the market low point in early April. Managed money net position in early January: 9.4% of total open interest - Positioning around Trump’s second inauguration. OPEC+ cut unwind: 2.5 million bpd - Discussed as the scale of cuts being unwound on paper. Already unwound barrels: about 600,000 bpd - Rory says about this much has already returned, but not all through visible exports. Potential returning barrels from Saudi Arabia: ~1.0 million bpd - Estimated remaining upside from Saudi if quotas are fully restored. Potential returning barrels from Russia: ~500,000 bpd - Estimated remaining upside, though Russia may be constrained by infrastructure damage. Potential returning barrels from UAE: ~500,000 bpd - Estimated remaining upside including baseline upgrades. Chinese crude inventories: up 40-50 million barrels YTD - Satellite-tracked visible inventories reportedly building much faster than normal. EIA 2026 oil demand: annual average decline forecast - Forecast is the first annual average demand decline since 2021, and ex-COVID the first since 2016. Global oil & gas investment 2025: $570 billion - IEA World Energy Investment Report cited by Rory. Prior global oil & gas investment: almost $900 billion in 2015 - Used as comparison to show a major decline in investment. Baker Hughes oil rig count change: down about 40 rigs in two months - EIA cited the rapid rig decline as a factor in weaker U.S. supply outlook. Current rig count: around 440 - Compared by Rory against about 1,600 in 2014 to show non-comparability over time. 2014 rig count: around 1,600 - Illustrates how rigs are much more efficient today than a decade ago. WCS Hardisty differential: about $8.85/bbl under WTI - Indicates tight heavy crude markets in Alberta. WCS Houston differential: about $2.50/bbl - Shows tightness in a key Gulf Coast benchmark for heavy crude. Heavy sulfur fuel oil crack spread: from worse than -$20/bbl to about -$4.5 to -$5/bbl - Demonstrates a much tighter residual fuel market than at the end of 2023. Canadian crude to Asia: about 10% of flows - Rory says this is a historically unusual diversification away from nearly all barrels going to the U.S. Gold technical target: 3,600-3,700 - Patrick keeps this upside target in play. VIX level: near 17 - Used to argue there is still room for volatility compression. S&P 500 overbought condition: ~300 points above the 50-day moving average - Patrick says the rally is stretched and due for a consolidation.

Pivotal Quotes: "the futures or term structure or curve is not the quote consensus forecast of the oil market" — Rory Johnston: Explaining that the curve reflects current physical conditions more than a simple market forecast. "this kind of weird, smiley check mark thing, it fundamentally can't last" — Rory Johnston: On the unprecedented WTI/Brent curve shape and the idea that it must eventually normalize. "I think we are in a new structural downtrend in the dollar, which is by design and desired by President Trump and Secretary Besant" — Patrick Serezna: Post-game technical view on the U.S. dollar.

Implications: Listeners should expect continued headline-driven oil volatility and possible curve normalization through either front-end weakness or physical tightness reasserting itself. Energy investors should watch China inventories, OPEC+ compliance, U.S. rig counts, and geopolitical shocks as the key drivers.