Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Oil Bulls Are Trapped in the Wrong Part of the Futures Curve
Transcript
- Lucas: So oil just had its worst week in roughly two years. WTI crude slid 7 percent in five sessions. Brent dropped over 8 percent. We're looking at WTI at $87.36 this morning, Brent at $91.12. Luna: And this is happening even though there's an active war — well, a ceasefire now — in the world's most important oil transit chokepoint. That feels backwards. Lucas: It does feel backwards. But that's exactly the puzzle I want to unpack. The conventional narrative says geopolitical tension equals higher oil prices. And for a while, that held. Brent spiked above $100 during the early phase of the Iran conflict. But now we're seeing the opposite — prices falling hard even as the situation remains fragile. Luna: So what changed? Is this just a demand scare? Or is something structural happening in the oil market itself? Lucas: I think it's partly demand, but the real story is in the futures curve. The structure of the oil market has flipped in a way that tells you exactly what traders are betting on. And if you're an oil bull, it's not a comfortable chart to look at. Luna: Alright, let's talk about the curve. But first — and this is completely organic to the conversation — a quick note. You know how we do this show every single day, no ads, no sponsors, just us talking through the numbers? Lucas: Yeah. And that's only possible because a small group of listeners chip in through buy me a coffee dot com slash fexingo. It's not a big ask — it's literally how we keep the lights on without selling your attention to anyone. Luna: If walking through the economy with us has made something click for you, that's the place. Buy me a coffee dot com slash fexingo. And now back to the oil curve — because this is actually fascinating. Lucas: So the thing about crude futures is they trade in a structure called backwardation when the market is tight. That means the near-month contract is more expensive than contracts further out. It signals that physical supply is scarce right now, and traders are paying a premium to get oil immediately. Luna: Right. And for most of 2025 and early 2026, we were in deep backwardation. The spread between the front month and the six-month contract was something like $6 or $7 a barrel at points. Lucas: Exactly. That was the bull case: tight supply, low inventories, and the curve saying 'pay up now.' But in the last few weeks, that backwardation has collapsed. The front to sixth spread has narrowed to under $2. In some contracts it's nearly flat. And that is a massive signal shift. Luna: So the market is basically saying the urgency to get oil today has evaporated. What drove that? Lucas: Two things. First, the Iran ceasefire. Even though the Strait of Hormuz is still risky — CNBC had a headline yesterday saying exports might not return to pre-war levels — the mere prospect of Iranian barrels coming back into the market changes the supply calculus. Iran could add maybe 1 to 1.5 million barrels a day if sanctions ease. That's not trivial. Luna: And the second factor? Lucas: Demand signals. The latest CPI and PCE data show inflation still sticky — core PCE at 129.6, up from 129.32 last month. That means interest rates stay higher for longer. And higher rates tend to slow economic activity, which means less oil demand. Traders are pricing in that slowdown now. Luna: So the curve is flattening because supply fears are receding and demand fears are rising. That's a classic recipe for a price decline. Lucas: Exactly. And here's where it gets even more specific. The selloff hasn't been uniform across products. Diesel cracks — the profit margin for refining crude into diesel — have held up better than gasoline cracks. That tells you the market sees industrial and freight demand as stickier than consumer driving demand. Luna: Which makes sense if the consumer is getting squeezed by inflation. People might drive less, but trucks still need to move goods. Lucas: Right. So the refining margin story is actually a microcosm of the broader economic picture. The market is saying: the industrial economy is slowing but not collapsing, while the consumer side is starting to crack. That's not a screaming buy signal for crude. Luna: Where do you see WTI and Brent settling in the near term? Is $80 the next floor? Lucas: I think $80 is definitely in play if the curve continues to flatten. But I'd watch the physical market more than the futures. If we see a build in U.S. crude inventories next week — the EIA data — that would confirm the loosening. If inventories draw, then this selloff might be overdone. Luna: So the key data point to watch is inventory? Not the headlines about Iran? Lucas: Exactly. Headlines create noise. Inventories create reality. The market has already priced in a lot of the ceasefire optimism. If physical barrels don't actually show up — if exports through Hormuz remain disrupted — then we could see a sharp reversal. But right now, the curve is betting on looser supply and weaker demand. Luna: And that's a tough place for oil bulls. You're basically fighting both the supply and demand narratives at the same time. Lucas: Exactly. The only thing that could change the calculus quickly is a supply shock — like a major outage in the Gulf of Mexico or a sudden escalation in the Middle East. But barring that, the path of least resistance for oil looks lower. Luna: Alright, so to sum up: oil's worst week in two years is being driven by a flattening futures curve, the Iran ceasefire prospect, and sticky inflation hitting demand. The curve is telling a clearer story than any headline. Lucas: That's the takeaway. And for anyone trying to trade this, the curve is your best friend. Watch the spreads, not just the front-month price. They'll tell you what's coming before the headlines do. Luna: Good stuff. That's all for today on The Commodities Economy. We'll be back tomorrow with another angle. Lucas: See you then.