If one follows the logic of your oil piece, it would be evident that the classical supply demand model is being used for commodity pricing. Here are some additional facts that tell us that it is not the whole picture:
1. The forward curve has been in backwardation for 6-months although the spread has now tightened. This shows demand(prompt demand) is not low enough for the supply side to crash.
2. Except for Chinese inventories, which have swelled up on cheaper Russian crude in the last two months, other notable inventories are actually down 5 odd percent from LTA, particularly in the US. This is an indication that at these prices, the US is still the marginal supplier and while their cost of production is now bordering at break even, driving season just finished and it remains to be seen whether they will cut back a bit.
3. OPEC bringing back production was absorbed during the summer due to a hotter than usual season. They barely increased any exports above last year's average till about last month. Investment decisions now align with value KPIs and less and less with ESG. Thus, the cut back in investment.
When you add some nuances to the story, the 'bleak' demand argument doesn't seem that relatively stronger.
From a hedger's perspective backwardation in these prices, which is now at the average range of the last 20 years, means you're getting paid about a $1 odd to buy the back end of the curve going into 2026. It's almost a textbook bullish signal.
If one follows the logic of your oil piece, it would be evident that the classical supply demand model is being used for commodity pricing. Here are some additional facts that tell us that it is not the whole picture:
1. The forward curve has been in backwardation for 6-months although the spread has now tightened. This shows demand(prompt demand) is not low enough for the supply side to crash.
2. Except for Chinese inventories, which have swelled up on cheaper Russian crude in the last two months, other notable inventories are actually down 5 odd percent from LTA, particularly in the US. This is an indication that at these prices, the US is still the marginal supplier and while their cost of production is now bordering at break even, driving season just finished and it remains to be seen whether they will cut back a bit.
3. OPEC bringing back production was absorbed during the summer due to a hotter than usual season. They barely increased any exports above last year's average till about last month. Investment decisions now align with value KPIs and less and less with ESG. Thus, the cut back in investment.
When you add some nuances to the story, the 'bleak' demand argument doesn't seem that relatively stronger.
From a hedger's perspective backwardation in these prices, which is now at the average range of the last 20 years, means you're getting paid about a $1 odd to buy the back end of the curve going into 2026. It's almost a textbook bullish signal.
Hey Prakhar, thanks for weighing in on the discussion. We appreciate you adding more nuance to the topic. We certainly didn't think of it in this way.