Brent's backwardation is telling us less than it used to
A $1.40 front spread looks tight until you notice that the prompt contract is now a fraction of the volume it was five years ago.
Tomas Lindqvist Head of Energy
Backwardation is the market's oldest inventory signal, and like most old signals it has been quietly degraded by market structure. The Brent complex now prices a basket of crudes across the North Sea with a delivery mechanism that has been revised twice since 2023, and the prompt contract's open interest is a shadow of what it was when the dated-to-front spread was the benchmark for physical tightness.
The practical consequence is that a $1.40 front spread today is not the same statement as a $1.40 front spread in 2019. We estimate the ratio at roughly 1.5:1 — meaning today's spread is consistent with something closer to $0.95 in the older contract's terms. That is still backwardation, but it is a market that is adequately supplied rather than one running out of barrels.
What the spread does still tell us, reliably, is the marginal cost of storage. When the front spread exceeds the all-in cost of floating storage plus insurance, floating inventories build. When it does not, they draw. On current numbers the incentive is neutral to slightly negative, which is consistent with the modest drawdown in OECD commercial stocks we have seen over the past six weeks.
The supply picture is where we differ from consensus. The market is pricing a comfortable 2027 on the assumption that non-OPEC growth continues at this year's pace, but the Permian rig count has been flat for two quarters and the productivity gains that flattered 2025 volumes are annualising against a higher base. Our model has non-OPEC growth slowing to 0.6mb/d next year from 1.3mb/d.
None of that argues for a spike. It argues for a floor. We see $76–$86/bbl as the range that clears the market through the first half of 2027, with the risk skewed to the top of it if OPEC+ holds the current cuts into the second quarter. A position that benefits from that skew is long-dated call spreads rather than flat price, because the flat price has to be right about demand as well as supply.
The bear case is straightforward and deserves airtime: if Chinese apparent demand continues to contract at the current rate, the inventory buffer rebuilds faster than our balance suggests and the floor gives way. We watch the Shandong independent refinery runs as the cleanest high-frequency read on that, and they have not yet confirmed the weaker demand story.
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