The forward curve for WTI (West Texas Intermediate) crude oil has shown an abrupt change over the past year, analysts at Standard Chartered noted in a new report sent to Rigzone.
“While the whole curve has moved lower year on year, the back of the curve has fallen the most,” the analysts stated in the report.
“The usual gentle asymptote converging towards a long-term oil price level has morphed into a nearly straight line pointing ever lower. The main question is whether the collapse at the back of the oil price curve is a market signal or a market failure,” the analysts added.
“Is the loss of the asymptote a vote of no confidence in the long-term future of oil … We think not. Our view is that the collapse in long-term prices is evidence of a market failure – rather than being a market signal it shows a failure to provide a useful long-term price signal,” the analysts continued.
In the report, the Standard Chartered analysts noted that they think a large part of the change is due to “an increasingly poor definition of longer-term prices due to lower market liquidity along the curve”.
“Previously, when the back of the curve fell too far there were several large investors prepared to add significant length and thus anchor the curve,” the analysts stated in the report.
“However, as liquidity along the curve has drained in recent years, this process of arbitraging prices across time started taking longer, and we think now it is not happening at all. If anything, trading the long term has switched to the front of the curve,” the analysts added.
“For example, we think short-term views are increasingly being defined by long-term banners (commodity super-cycle, peak oil demand, etc.) rather than current conditions. It is perhaps ironic that just as the usefulness of tradable market signals about relative long-term energy prices is growing (due, among other things, to energy-transition planning), the signals themselves are fading, losing definition and becoming more opaque,” the analysts went on to state.
WTI, Brent Forecasts
In its latest report, Standard Chartered projected that the WTI price would average $88 per barrel in 2023, $95 per barrel in 2024, and $106 per barrel in 2025.
The company expects the commodity to average $87 per barrel in the second quarter of this year, $85 per barrel in the third quarter, and $91 per barrel in the fourth quarter, according to the report. The WTI price is expected to average $89 per barrel in the first quarter of next year and $91 per barrel in the second quarter of 2024.
Standard Chartered anticipates that the Brent oil price will average $91 per barrel in 2023, $98 per barrel in 2024, and $109 per barrel in 2025, the report shows. The company expects the commodity to average $90 per barrel in the second quarter of this year, $88 per barrel in the third quarter, and $93 per barrel in the fourth quarter, according to the report. Brent is expected to average $92 per barrel in the first quarter of 2024 and $94 per barrel in the second quarter of 2024, the report outlines.
The U.S. Energy Information Administration’s (EIA) latest short term energy outlook, which was released earlier this month, projected that the WTI spot price would average $77.84 per barrel in 2023 and $71.57 per barrel in 2024. The Brent spot price was anticipated to average $83.63 per barrel in 2023 and $77.57 per barrel in 2024 in the latest STEO.
At the time of writing, the WTI price is trading at $74.08 per barrel, while the Brent price is trading at $80.81 per barrel. Both commodities have yoyoed this year, with WTI closing January 4 at $72.84 per barrel before bouncing up to a close of $87.47 per barrel on January 26, dropping to a close of $73.39 per barrel on February 3, and rising back up to a close of $80.14 per barrel on February 13.
Brent closed January 4 at $77.84 per barrel before rising to a close of $88.19 per barrel on January 23, falling to a close of $79.94 per barrel on February 3, and rising to a close of $86.61 per barrel on February 13.