ICE Brent futures backwardation widens ahead of Trump's inauguration

The backwardation in the ICE Brent futures structure widened Jan. 20, likely reflecting expectations of a future supply glut and signaling bearish sentiment in the oil market following the inauguration of US President Donald Trump.

The Platts-assessed M1/M2 February-March ICE Brent futures time spread widened to an average of 88 cents/b month to date Jan. 20, more than doubling from December's average of 38 cents/b, S&P Global Commodity Insights data showed. The spread reached a near eleven-month high of $1.44/b at the Jan. 17 Asian close, its highest level since hitting $1.49/b on Feb. 29, 2024.

Following Trump's inauguration late Jan. 20, US crude oil M1 February futures dipped in early morning trading in Asia, settling at $77.80/b at the Jan. 20 Asian close.

"Markets found broad relief as Trump's inauguration speech turned out to be a far more subdued affair than some had been concerned about," Vishnu Varathan, managing director at Mizuho, said.

Analysts cautioned that the relief may be overblown, pointing out that the lack of details in Trump's speech does not eliminate the possibility of upside risks related to trade.

Trump consistently advocated for lowering energy prices by increasing crude oil production, and analysts noted that manifesting his "drill, baby, drill" mantra could sour the country's relationship with OPEC+ members, especially given the tepid global oil demand outlook for the year.

"If US oil supply were to surge dramatically, it could potentially reignite a Saudi Arabia-led price war, leading to an oversupply in the market and driving energy prices lower," Hu You, research analyst at iFast Financial, said Jan. 21.

Still, despite falling oil prices, they are unlikely to see a sharp decline.

"US' energy dominance ambitions necessarily mean diminished sway for the OPEC+, which ought to dampen, but not crash, oil prices," Varathan said.

Impact on US-China relations

While Trump held off on announcing Beijing-specific tariffs on his first day in the Oval Office, some may view his phone call with Chinese President Xi Jinping on Jan. 17 as a step toward more cordial US-China relations.

"However, there has been little tangible progress toward easing tensions. Trump is still expected to expand controls on products sold to China," Hu said.

"Kicking the can on tariffs merely delays the inevitable trade antagonism in the offing. And to 'study' how to 'reverse the destructive [to the US] ... trade policy' is the smoking gun," Varathan said.

That being said, if the world's largest crude consumer engages in a production hike without triggering a price war, any imposition of tariffs -- particularly on Mexico, Canada and China -- is unlikely to significantly impact global crude oil prices.

China -- the world's largest crude oil importer -- has been shifting away from the US, turning instead to suppliers such as Russia, Iran and Venezuela for crude oil, all of which offer the product at cheaper prices.

"As a result, tariffs against China are expected to have minimal direct impact on the global oil outlook. Instead, concerns over sluggish economic growth and a weaker oil demand outlook are more likely to exert downward pressure on crude oil prices," Hu said.

"Additionally, the conversation has had no notable impact on the energy market," Hu added.

Musings on monetary policy

In response to potential tariffs from the US, some may expect a devaluation of the Chinese yuan to enhance the competitiveness of Chinese exports.

"[However], while China may seek to ease monetary policy, it is unlikely to do so aggressively, aiming to maintain currency stability, protect the financial system, and prevent significant capital outflows," Hu said.

On the foreign exchange front, a weaker yuan is likely to bolster the strength of the US dollar.

Still, the ICE US Dollar Index was down 0.79% from the previous close at 108.340 as of 0200 GMT on Jan. 21. A weaker dollar makes dollar-denominated assets like oil futures less expensive for investors holding foreign currencies, thereby boosting demand for these assets and capping losses in crude oil futures prices.

"Accordingly, the significant (~1%) drop in the US dollar on trade relief may be part of a series of controlled convulsions to come, not a bearish US dollar trend, amid sustained relief in trade-driven currencies," Varathan said.