The first rule of Oil Club is that supply balances price and demand. The second rule of Oil Club is that SUPPLY balances price and demand! The third rule of Oil Club is that if someone pumps above their quota, we increase supply.
In the olden days—as far back as January 2025—it would have been front page news if oil prices fell with almost 20%. In our new (lack of) economic world order, it is apparently just called Thursday.
“Oh, pray tell,” you might say, “surely, falling prices is a good thing, what with inflation and stuff?”
That depends.
If you are in demand of oil, as in a net importer, then yes, falling prices are good because now you can get the same amount of oil for less. In the economy textbooks they will follow that statement with a ceteris paribus (all other things being equal), though rarely all other things are. If oil prices go down, renewable energy prices (comparatively) go up, and that’s obviously a bit of a bummer.
If you are an oil supplier, a net exporter, it’s also not so great because you won’t make as much on what you sell. If at the same time your currency is the weakened USD, your profit margin is being hit twice.
And that is not to mention the triple whammy if you produce your oil stateside and $62 per barrel is what you need to break even, and you begin to shed rigs to prepare for a prolonged slump. Those drilling babies are hard to get back.
Speaking of oil supply and multiples of whammies, that is what got us here in the first place. First the Americans were liberated to the tune of global recession worries and thus diminished oil demand.
Then OPEC+, which is a supplier group consisting of OPEC and ten other oil-producing countries, unexpectedly tripled their planned output hike for May because some members—and we are looking at you, Kazakhstan and Iraq—were pumping above their quota.
The result is, to use the Financial Times’ term, a weird-looking forward curve. For contracts up to nine months out the curve is in backwardation (downward-sloping) and from the ten-month contract it is in contango (upward-sloping). That hasn’t really happened before, so it is difficult to say what it means, apart from triggered nervous systems and sleep deprivation.
Except for shortly during the pandemic, the curve has been sloping downward since 2017. That has been due to Oil Club, AKA OPEC and crew, keeping the supply under control and hence the price on the higher side. That regime might be coming to an end.
The upward-sloping curve has happened when traders have bought up cheap supply and stored it for later which naturally has lessened the power of supply shocks. So maybe that is the market’s hope for the holidays?
It is almost as if there is some sort of secret fight club going on.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.
This article is part of the FRG Risk Report, published weekly on the FRG blog. To read other entries of the Risk Report, visit frgrisk.com/category/risk-report/.