Flat NYMEX oil futures curve is signal we are near a bottom

[dan_s]

https://www.mcoscillator.com/learning_center/weekly_chart/crude_oil_backwardation_almost_to_zero/?utm_source=McClellan+Chart+In+Focus&utm_campaign=240e235087-email_cif_2025-05-30_crude_oil_backwardation_almos&utm_medium=email&utm_term=0_9e79f8200f-240e235087-151586586

Go to the link above to see the charts mentioned below.
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The McClellan Market Report

May 30, 2025

Crude oil prices peaked on January 15, 2025, just before the inauguration of President Trump, when expectations were running high for strong economic growth. The economy has not turned out that way thus far, and oil prices have fallen to multiyear lows.

One effect of that has been that the large "backwardation" in crude oil futures in January has now receded. Backwardation is a term referring to the condition where the near month price for any type of futures contract is higher than the prices for contracts maturing further into the future. It is a condition which reveals near term supply stress, such that traders are willing to pay up to make sure that they have near term supplies.

Most of the time, crude oil futures exist in backwardation. This is due in part to the rather high storage costs involved with trying to stockpile oil. By comparison, you can store a large dollar amount worth of gold for not very much money. But oil takes up a lot of space, and has some expensive environmental particulars which govern how you might try to store it.

For the 4+ years shown in the chart above, oil futures have been in backwardation almost all of the time. Just getting down close to a zero value for this comparison of near vs. far contract pricing has been enough to mark a decent price bottom for crude oil. And that is where we find it now, not right at zero but very close. That suggests an upward bias for oil prices in the weeks ahead.

It is worth noting, however, that the conditions of the past 4 years have not always existed, and crude oil futures have at times gone to a really severe "contango", which is the opposite condition of backwardation. This next chart shows the same comparison, just looking farther back in time.

We can see that at times of really immense economic turmoil, oil futures have gone into very large contango. The most recent of these was the 2020 Covid Crash, when oil futures famously traded for negative prices, because traders could not exercise the contracts since all of the storage capacity in the delivery site of Cushing, Oklahoma was full. We also saw big contango in late 2014, when the fracking boom led OPEC to relax its production limits, and oil prices were cut in half in just a few months. And of course the Great Financial Crisis in 2008 saw its own big negative spike.

It is a good bet that someday we will once again live through another event like those, and we will see another big contango in oil prices. For now, though, crude oil futures have been showing a bottoming condition whenever backwardation gets down to just around zero, the condition we have now.