MacroVoices #484 Rory Johnston: Crude Oil Forward Curve Conundrum
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This is Macro Voices, the free weekly financial podcast targeting professional finance, high net worth individuals, family offices, and other sophisticated investors. Macro Voices is all about the brightest minds in the world of finance and macroeconomics telling it like it is, bullish or bearish, no holds barred. Now, here are your hosts, Eric Townsend and Patrick Ceresna.

Macro Voices Episode 484 was produced on June 12th, 2025. I'm Eric Townsend. Commodity Context founder Rory Johnston returns as this week's feature interview guest to talk all things crude oil. Rory says the WTI forward curve has taken an unprecedented and bizarre shape.

Regular listeners will recall that I have a trade on long Z5 short M6 time spreads for the exact reason that I noticed the exact same anomaly that Rory noticed in the evolution of the WTI forward curve.

So are you ready for the big reveal? What's the market telling us with this unprecedented inflection point recently forming around the start of 2026, where the WTI futures forward curve flips suddenly from steep backwardation to moderate contango? Listeners, are you ready to hear from true crude oil market experts and veterans what this term structure signal means to the market?

Well, then you better tune into a different podcast because Rory and I don't have a goddamn clue. We're both stumped by this one, but we'll be happy to throw you a few educated guesses in this week's feature interview.

The interview was recorded on Tuesday before speculation that a military strike on Iran could be imminent, which spiked crude prices almost another $4 higher on Wednesday during regular trading and almost $5 if you include the spike that happened just after the 6 p.m. futures reopened.

So my guess is that by the time you hear this podcast, either there will or will not have been a very significant military strike on Iran, and crude oil will either be retracing to the downside if there was not, or probably even higher if there was one. Needless to say, as we've been saying, this is a headline-driven market.

And I'm Patrick Ceresna with the Macro Scoreboard week over week as of the close of Wednesday, June 11th, 2025. The S&P 500 index up 87 basis points, trading at 6,022. The crawl higher continues, but the market quickly is approaching some formidable overhead resistance. We'll take a closer look at that chart and the key technical levels to watch in the postgame segment. The U.S. dollar index down 23 basis points, trading at 9,858.

distinctly weak price action as the dollar is testing the lows of the year. This begs the question, is there another leg lower imminent?

The July WTI crude oil contract up 843 basis points to 6815. The bullish squeeze is underway, driven by that geopolitical escalation. The July RBOB gasoline up 640 basis points, trading at 216. The August gold contract down 165 basis points, trading at 3343.

over the last week, but the broader precious metals market is bullishly active. The July copper contract down 143 basis points, trading at 481. Uranium down 141 basis points to 70. And the U.S. 10-year treasury yield up five basis points, trading at 440. The key news to watch this week is Friday's University of Michigan inflation expectations.

And next week, we have the FOMC statement and press conference, the Bank of Japan and Bank of England monetary policy statements, and the U.S. retail sales.

This week's feature interview guest is Commodities Context founder Rory Johnson. Eric and Rory discuss crude oil market overview, the current term structure, the fundamental drivers, U.S. shale, and more. Eric's interview with Rory Johnson is coming up as Macro Voices continues right here at MacroVoices.com. ♪

And now with this week's special guest, here's your host, Eric Townsend. Joining me now is Commodity Context founder Rory Johnston. Rory, it's great to get you back on the show. It's been way too long. Let's start with the crude oil market. Almost feels to me like we're seeing the beginnings of maybe an upside breakout. What do you think?

I mean, we're definitely at the highest level. I mean, with Brent kind of sitting around 67, 68 bucks a barrel, highest level since the latest sell off in April. Still a decent ways off of kind of where we started prior to President Trump's Liberation Day tariff announcements and the kind of double tap follow on of OPEC plus announcing this kind of

accelerated production increase schedule. But it definitely looks like things are firming up. I think a lot of the kind of teasing, kind of temptation of us dipping into full curve contango seems to have been at least averted for now. But what's left us with is the fact that the curve is in this very, very weird shape. And in some cases, at least on the Brent curve, kind of an unprecedented shape that

You have extreme backwardation now, or at least material backwardation across the first four, five, six months of the curve. And then you have broad contango everywhere else through. You've seen it historically where you have like lighter backwardation in the front, but this kind of juxtaposition of like very steep backwardation at the front and broad contango is pretty unprecedented. And I think that is,

A kind of a flattening of the entire debate in the oil market right now between these expectations of looseness to come and the reality of kind of still reasonably tight markets by any other way we measure them.

Well, let's talk a little bit more about what's going on in that term structure, because I don't get it either. I do have a trade on in this market because I'm hoping that that contango that we see about six, eight months out on the curve is eventually going to flip back into backwardation. But we'll see whether that happens. I guess what I'm stuck with, Rory, as I look at this is

It's so pronounced. There's such a sudden change right around January, February. All of a sudden, the curve changes from steep backwardation to significant contango.

I would think there would be some event or news on the horizon. Everybody would be saying, oh, well, surely that's because of XYZ that's going to happen in January. I can't put the event with the shape of the term structure. Can you? No. And I think even when you look at the kind of fundamental justification for a bearish view, which I think is that narrative is driving that contango emerging across the bulk of the curve, is the expectation of looseness is now being shifted to around...

you know, September kind of end of summer as driving season lets up as Middle Eastern direct burn for power and AC lets up that you're just gonna be left with all this additional supply, particularly by that point, OPEC plus, or at least the subgroup of eight may have returned the entirety of its two and a half million barrel a day cut, at least on paper. So that's when we would expect to see that looseness emerge. But you're right that

the Brent curve now is actually backward dated out through to January. But I think what's even stranger is that I, for like my entire career to date, have really pressed the point that, quote, the forward or futures curve is not the, quote, consensus forecast of the oil market, that much more than representing expectations, it's a kind of a,

physical representation of the current status of the market with, you know, the curve typically broadly backwardated or broadly in contango. Backwardation when you're tight and supply is short and you need to draw inventories and contango in the opposite when you need to kind of finance inventory storage. And the other thing that's strange here is that typically when you transition between backwardated markets to contango markets, that typically is driven first by the

By the front of the curve, because that's where you're first going to see the realization of kind of either, you know, like, let's say right now, we have been in a backward market. If we're flipping into contango, you'd expect that to emerge first at the front of the curve, not in the belly. So the combination of those things is very, very strange. Not only do you not typically see the structure, but it's also traveling in the opposite direction you'd expect it to.

Well, great minds think alike because we seem to be seeing this in very similar ways. What I would have said about this is the way that a market evolves slowly from backwardation into a contango is almost always right at the very front of the curve. You'll see the first month or the first two months fall into a contango and then it's three months and then it's four months and eventually the curve all transitions into a contango.

But there's another setup that has happened historically, which is when there is an ongoing

obvious fundamental driver that would change those supply and demand characteristics. You'll sometimes have several months that are in backwardation, that it switches into contango at some point. And what the market is doing is basically forecasting that that's what's going to happen because everybody knows that news event that's going to change the supply demand fundamentals at some specific point in the future. This curve looks like that, but

I can't figure out what the event is, what's going to happen around January that's going to change the dynamics of crude oil, you know, supply demand balance. It seems like it's going to get loose in January for some reason. Yeah, I mean, I completely agree. That is what the curve is saying as a forecast. And I completely agree in terms of what would be driving that. But it doesn't jibe with anything. No, but here's the thing.

I think fundamentally on paper, looking straight at kind of balances and forecasts, things do look bearish, right? That you have demand growth that is not especially strong. You have, you know, OPEC plus growth.

at least on paper, ostensibly increasing production, not by, you know, 2.5 million barrels, not over 18 months, but basically over now the assumption is seven months. That's a lot of oil very, very quickly, faster than demand almost grows in any, even a fantastic year, two and a half million barrels.

So on paper, we should absolutely be moving looser. But the thing that's strange about this is that we're already, you know, 600,000 barrels a day-ish up from those cuts being unwound. And we have yet to see really much of this materializing in the form of exports. Sure.

I think what you're hearing a lot of in the market is that, you know, Saudi and kind of broader, you know, Gulf region demand for crude and fuel oil for direct power burn is potentially running stronger than usual. But you would have to be moving. You'd have to be moving.

running much hotter than usual in order to kind of account for the full kind of, you know, lack of a visible supply response, given that production should be rising already. I think combine that with the fact that I did a piece a little while ago looking at kind of how, you know, implied production from the broad group of eight or great eight as one of the ministers was calling them for a while. They

Most of them are, you know, are cheating, right? Along some kind of lines, they are already producing more than they should be, even by the end of this unwinding, let alone at the beginning. So really, when you're looking at who is left in terms of likely returning barrels, again, if you're trusting any of these numbers, is basically Saudi Arabia with a million barrels a day, Russia with roughly 500,000, and then the UAE with around 500-ish thousand as well between

the cut unwind and the baseline upgrade that they achieved over the same period. That's a lot of oil, but so far we're not seeing Saudi...

or implied production move like we'd expect it to given the stated increases. Russia likely has, you know, also haven't seen a huge supply response there. And in fact, there's a lot of reasons to think that they might not be able to increase production exports given, you know, the cumulative damage across their entire infrastructure system. And then the UAE as well. This is a country that has been

by all indications, kind of dramatically above its stated OPEC quota or target for a year or two or three now, they've actually pulled back on that implied overproduction at a time that they should be actually opening the gates to produce more. All of it is very strange. And I think that's part of why the

The market broadly still doesn't know what to make of it. I think you've seen a lot of people, frankly, confused kind of. And I think it's happening at a time when so much is kind of pummeling you on the kind of macro headlines from, you know, an Iran deal to, you know, trade negotiations with China to what's going on with Russia. There's just so much happening.

And then underlying that the kind of most basic stuff in the oil market doesn't seem to be following its normal rule set. So I think like everyone's just waiting for something like rubber to hit the road somewhere to kind of get a fundamental signal of what's actually happening.

Now, our other favorite Eric and Rory topic is the petroleum reserve. Could it be that that's related to this? Because although, frankly, I can't come up with a good explanation as to why this would be the reason, it does seem to me that this strange shape of the term structure of the forward curve kind of

developed right around the same time that we started talking about the big, beautiful bill. And that implies refilling of the SPR. Could it be that an SPR refill somehow is part of this? And if so, how would that explain what we see in the curve? So I think

It could theoretically do that if they were already purchasing the barrels. I think part of the challenge is that we don't have the big, beautiful bill yet. And these purchases are already showing up. And not only that, not only that the money isn't there so that the DOE's petroleum account, basically the pool of funds they can use to make these purchases,

is essentially empty now. So they need this money from the big, beautiful bill. But then also you had Secretary Wright, Secretary Chris Wright, the Energy Secretary, today actually state, I saw a headline, that basically they can't refill the reserve until they do additional repairs on the system, which I don't know if I trust entirely. I think that's probably a bit of a talking point.

But they continue to pledge increases, but I don't think we've seen any real barrels, you know, any real purchasing demand materialize. That said...

Where I do think you could have the same equivalent thing, but not the US SPR, but the Chinese inventory building is maybe, I think the bearish read on this market, and let me just take a, put my bear hat on for a second, is that maybe the broad structure of the curve is more or less correct. That we are dipping or we are weakening into contango, but...

We all know that Beijing and kind of Chinese traders and trade houses love a bargain on commodities. And what we've seen is actually Chinese visible crude inventories tracked by satellites. I was seeing the data from Kepler yesterday. They show Chinese crude inventories building much faster.

than normal for this time of year. I think it's up 40, 50 million barrels year to date so far, which is much faster than you'd expect for their normal pace, which could explain some of that kind of prompt tightness that, you know, they don't actually care about paying

50 or 30 cents a barrel more. They just want the barrel because in the mid 60s, they're feeling pretty good about that being a good buy. And they still have plenty of space in their inventories. But I think that is the one thing that I'm looking at saying, okay, why would they be building inventories in China faster than normal when the curve structure says you should be doing the exact opposite of anything? You should be drawing down inventories right now and basically refilling the same barrel in like,

half a year and basically just capturing that arbitrage entirely as long as you can like lend the barrel to the market. So the market signals for those Chinese tank holders are opposite of what we're actually seeing them doing, which if you kind of reverse the causality means that they maybe they are actually ones that are driving part of this front end tightness that we're seeing that would help explain and kind of square away that story.

Well, we should back this conversation up just to the fundamental drivers of why higher prices in the first place. There's a lot of consensus view in the last several weeks that, yeah, you know, President Trump's working on getting lower oil prices, OPEC's increasing production. You know, there's lots of good reasons to think that this market was going to drift lower. Now we're seeing the exact opposite of what most people assumed.

It feels like that's because there's some surprise or secret that not everybody has figured out yet, including us.

Let's figure it out. Yeah. So, I mean, and even beyond, you mentioned kind of two supply side issues, kind of Trump trying to talk down the price and then OPEC adding more to the market. But there's also, you know, demand was performing reasonably well in the first two months of the year by my estimates, but then began to fall apart again in March and April. So you're, and that's mainly driven by China, which part of the variability of this market is that Chinese demand signals have been all over the place.

And just to kind of recap the audience very quickly, basically, you had China for the last decade plus prior to COVID was the single most reliable bullish factor for the oil market. Half a million barrels a day plus of incremental demand each and every year without fail.

COVID happens, we begin to kind of flatline as policy tries to figure itself out. In 2022, we thought we were going to get really tight and Beijing locking down with COVID zero causing the first annual average demand contraction, basically in two plus decades. Then in 2023,

Demand roared back out of that kind of out of that contraction to be, by most estimates, the single largest year over year demand growth of any country in history, like over a million and a half barrels, almost two million barrels, depending on how you count it. And then in 2024, that reversed again and flipped back to most optimistic flatline and probably more likely a decline of, you know, 100 or 200,000 barrels a day.

That's a lot of variability in what used to be the kind of most steady state factor in the oil market. Even this year, we've basically traced that exact thing, you know, shrunk that timescale down. And now each month, we're basically, okay, this month, we're up half a million. This month, we're down 200. Next month, and it's all over the place. And I don't, I still don't have, I still have yet to hear anyone give a compelling kind of consistent explanation of

for what's happening with Chinese oil demand. We know broadly that there are kind of headwinds that you've seen. Obviously, the trade war was having kind of a deleterious effect on shipments and manufacturing demand. At the same time, you had kind of very known displacement of some demand, say, in

electric vehicles where you have, you know, because of their desire to reduce their dependence on foreign oil. It sounds like kind of almost like the United States and like the 1970s, but they wanted to reduce foreign oil demand. So, or foreign oil reliance. So they've, you know, pushed EV or new energy vehicles to more than 50% of, of consumer sales. That is obviously going to eventually take a bite. The other thing I think we've talked about this before is that you've seen on the industrial side,

Displacing diesel is kind of increasing penetration of natural gas feedstock in these kind of heavy trucking fleets. So China is all over the place. And that alone, you know, if you can swing between negative 200 and positive 500, like a 700,000 barrel a day swing in oil balance is a huge deal, as you well know. And it's happening every other month right now. So that I think also adds to this kind of bearish backdrop.

But to your point, the market is not currently acting all that bearish. So what is happening? And I think part of this we actually saw confirmed today from the EIA, which just it's where we're recording on Tuesday, June 10th. And the EIA just released its new short term energy outlook. It's kind of rolling forecast of the market. And they are now forecasting that in 2026,

annual average oil demand will actually decline for the first time since 2021 and excluding COVID first time since 2016 and before that 2008. So this is a pretty momentous pivot point on the US supply story because on the flip side of

China being the most kind of reliably bullish, consistent demand growth on the market. U.S. shale was the most reliably bearish supply growth in the market. Now, both of those factors are basically flatlining, if not reversing. And it's a very, very different market. I think participants are still trying to get their hands around it. Do you believe that forecast yourself, Rory?

I think eventually we will likely get to a peak of oil demand, but I don't think it, I'm not someone that sees it happening this decade. I think we're probably talking mid 2030s. If you listen to OPEC, we're basically going to plateau around 2050. I think that's probably a bit too sanguine.

But again, I think when you like we're right now, we're seeing the kind of beginnings of that of that transition of slowness. Now, you know, what used to be kind of a steady assumption of a million and a half barrels a day of growth, or let's say one and a half percent year on year demand growth year after year after year. Now we're kind of are we lucky to get one? And in some years, we're getting like last year, we got more like 0.40.5 million barrels a day of growth. That

It's not a peak yet because it's still, you know, growing in absolute terms, but the pace of change is slowing. I don't think it's materially different if we hit peak demand in 2030, 2035, or 2040. If the difference in the average pace of demand growth in, say, the 2030s is, you know, maybe we're debating 100,000 barrels a day of growth versus 100,000 barrels of contraction, that actually isn't as big a change as...

even the 1.5 million barrels a day of pre-COVID norm to the kind of 500,000 barrels a day of increasing of what we saw last year. So that itself was already a bigger swing.

I don't put a lot of stock in the importance of the particular year or whether or not we're going to peak out. If, you know, even OPEC said we're going to peak at like 100, 120 million barrels a day by 2050, I think was the number, which sounds really bullish, but that's, you know, we're talking about 25 years and we are only growing maybe 15 million barrels a day of demand. That's much, much, much lower and slower than we would have grown historically. So I think

It's not the peaks are important, the kind of pace. And when we when we hit that kind of newfound low pace of demand growth, I think it's the more important factor.

Rory, let's talk a little bit more about U.S. supply growth. One of the things I've been talking to Dr. Anas Al-Haji about is really, I think the U.S. has saved the day. A lot of people thought there was going to be a global energy crisis in the early 2000s because we were essentially, it was the peak oil thesis that we were going to not be able to produce oil.

enough oil. It feels to me like the way this has evolved is the U.S. has saved the world from an energy crisis. If we cannot continue to grow U.S. shale, it seems to me like, you know, that's the valve that unless we've got another supply of energy, once shale is played out, we're screwed. Am I right about that? And if so, how close are we to shale playing out?

I think that was definitely true in the kind of 2010s. I think that the period of kind of

insatiable growth in U.S. production through that period, I think absolutely saved the market. I mean, saved consumers, obviously, kind of tanked the market from 2014 forward. But I think absent those barrels of growth, earlier I made the kind of parallel between U.S. supply growth and Chinese demand growth, that Chinese demand growth in any given year was half or more of global demand growth, whereas in many years,

U.S. supply growth was more than the entirety of global demand growth, that the rest of production actually declined to make room for that kind of boom of U.S. shale, most notably with OPEC cuts, as they literally kind of made a discretionary decision to say, we're cutting to try and, I mean, they wouldn't have phrased it as making room for U.S. shale, but trying to deal with the kind of supply boom there. So I think that's a, it's a massive, it's a massive change. And I think

When we're looking at one of the things that the EIA mentioned in it, like explicitly mentioned in its update to its forecast, which again, I think people typically assume and kind of associate the EIA with a fairly bearish outlook. So the fact that, you know, the bearish outlook EIA is now saying that U.S. crude production is likely going to roll over, I think is pretty, pretty important, right?

And I think they explicitly note the rig count in, you know, the fact that the rig counts, quote, have declined much more quickly than expected over the past month and really over the past two months. So just to kind of give a sense here, the Baker Hughes rig count for, you know,

for oil is down by kind of 40 rigs over the last two months. That is a fairly fast decline in the scheme of things. And while I think it is correctly, I think the

The rig count is a pretty fraught number for a bunch of different reasons because across history, you're really not looking at the same number over time. As a great example, I'm just have my, the rig count on my screen here. And the rig count in 2014 was around 1600 before the, at the end of 2014. And now it's around 440. So,

Those are completely incomparable because obviously the U.S. is producing much more oil now than it was in 2014. So the rigs now are much more efficient. People know how to use them much better. They're drilling wells faster. We're completing wells faster. You're doing longer laterals, all this stuff. So those aren't comparable over a 10-year period. So it's a very difficult number to just kind of show a chart and say, see. But I think it's entirely fair game to say, um,

you know, we can compare the rig count today to the rig count from two months ago. Like we haven't had a step change in kind of technology over that period. And in many cases, you've actually heard that, you know, per foot well kind of productivity has actually been either plateaued or you've seen gains beginning to slow. The one thing we still do need to look out for here is in terms of like the average efficiency or the average productivity of the rigs that remain in the field is that

you know, over a period, I guess, as the prices fall and U.S. producers begin to pull back, they're going to pull back on their worst rigs first, right? They're going to keep their best rigs in the field and the worst rigs are going to come off first. So this isn't, I don't think, a complete, you know, as of yet, it's not a complete route. But as you see with the changing EIA forecast,

the, the rigs are, are, are best kind of highest frequency indicator of where upstream activity is. And those rigs began to fall off immediately following, uh,

The early April reciprocal tariff announcements and followed by the OPEC announcement of acceleration and now and the kind of price decline that followed all of that. So even faster than usual, you normally have a bit of a bit more of a lag between price declines and and kind of rig changes.

But also if, as you noted and we were talking about earlier, if there is increasingly just this consensus that this wall of supply is coming to the market and kind of get out of the way now while you can, maybe that helps explain why those rate counts have declined even faster than we would have expected, even just based on the prices to date.

Let's talk about the speculative positioning in this market and investor sentiment. What are the commitment of traders reports telling you? So, commitments of traders report over the last couple weeks have begun to tick higher again. And I think this probably explains a lot of the flat price increase we've seen and the fact that we're kind of now sitting back around the highest level since April.

or since late April at least. But I should note that that's still overall at the very low end of where we could be. As an example, we're right now between the two largest Brent and WTI futures contracts. The net position of managed money or speculators in this market is roughly 5.5% of total open interest, which is up from 3.4% in early April when the prices kind of hit their low point,

but still well off where we were in early January, immediately kind of in line with Trump's second inauguration, where we were at 9.4%. So we've come notably off the lows of positioning, but we're still way off the highs. And we're still really kind of even what I would consider slightly oversold based off your trailing kind of midpoint of those levels. And I think that is kind of route in spec positioning happened earlier

immediately alongside the emergence of that weird futures curve that we've been talking about. And I think that helps explain why, yeah, it was these funds that were really selling off on this narrative while the prompt kind of physical market remained

I mean, for a long period, it wasn't rip roaring, but we've strengthened again. And then you actually never saw the front of the curve tip into contango, which even over the past couple of years, there have been periods where we've actually tipped into prompt contango, at least briefly, while the rest of the curve remained backward. So again, this is what's weird right now. And again, I think you part of the increase in prices has been these funds coming back to the market. And even the depths of that

belly of the curve contango has materially improved. And, you know, relative to, I think, a month or two ago when we were at our low point, you know, we were barely at a, like, people were talking about the smile curve for a while. We were barely at a check mark at the low point. We were so close to kind of prompt contango at the front. But now we're very well, I mean, the prompt backwardation on contango

Brent right now is at 75 cents a barrel. And that is spread out not rather than just the front two contracts in the curve are now actually kind of the first six contracts of the curve. And actually the front two contracts are now actually higher than the entirety of the rest of the curve. So if you looked at just the front two contracts in the back,

The whole curve would look backwardated. It's just what's happening in the middle. You know, the journey is where the fun is going to be, apparently. Rory, I find this fascinating because historically, it used to be that the WTI curve and the Brent curve kind of had different personalities. The WTI curve was the one that would sometimes get a little bit of contango at the front of the curve, while the Brent curve was staying in backwardation at the front of the curve.

It seems like they've almost reversed roles. And I always had a theory that it was the storage aspect of the WTI contract and the way that it works that caused that difference. You wouldn't expect to see Brent doing what it's doing. None of it adds up for me. Does it make sense to you? Can you come up with any explanation for why we're seeing the Brent and WTI behaviors different than what we usually see?

Yeah, I think, I mean, one thing that I've been considering, I have yet to kind of really validate it, but it's one of the things I'm considering and explaining this kind of evolution, because you're right. We actually have seen a little bit more of this shape historically in WTI that we haven't in Brent.

And part of what's obviously changed between that historical episode, WTI and today, is that WTI is also now functionally the largest grade of crude in the Brent basket. So you've seen kind of almost this kind of like overlapping of the contracts in a way that I agree historically, they traded much more differently. So now that you've had WTI provide the majority of the new liquidity in the Brent complex, we're starting to kind of almost import

some of that idiosyncratic WTI curve behavior into the global market as well. Rory, let's touch on another subject that's near and dear to both of our hearts, which is blend stock for being able to refine crude. The situation that we have in North America is we very urgently need

heavy blend stock to mix with the super light oil that we make in North America or that we produce in North America. Really important to have access to it. We seem to be trying to start wars with pretty much all the countries that supply it to us, except Canada. Oh, wait a minute. No, we're sort of trying to start a spat with them, too.

Between Western Canadian select and Venezuelan and Iranian heavy crudes, those are pretty much the only ones I know about that are available in enough supply to provide the world with the blend stock it needs. Are we running up against a situation where maybe we could get into a blend stock crisis at some point?

Well, I think, I mean, the way I assess this is essentially looking at the differentials born by WCS, which is, you know, now is the most

visible liquid kind of heavy crude marker in the world, which I think is, you know, historically, a lot of these other blends, like either some of the OPEC, OPEC crudes, or even Mexican Maya, were always, you know, done on these quarterly or monthly kind of contracts and stated prices, official selling prices, which didn't allow for a lot of kind of analytical value, like you got something from it, but not to the same degree that you get of like a

a daily or even intraday trading contract like WTR Brent. But now when we have WCS, we have a lot more granularity of what's going on.

What we're seeing right now in WCS markets in the primary hub in Hardesty in Alberta, that contract is sitting around. It's tighter than $9 a barrel under WTI. I think we're at $8.85 as of yesterday's close. And we've also seen the differentials in Houston, which is, you know, assuming no inflation.

egress costs or anything else and in direct competition with Mexican Maya and Venezuelan Mary and even, you know, Basra Heavy or whatever other OPEC crudes you want to look at, you know, that is also extremely tight at two and a half dollars a barrel. Part of this, I mean, part of this is being driven by the exceptionally tight market for heavy sulfur fuel oil globally.

I'm sure you remember, Eric, back when like IMO 2020 had everyone spooked about what was going to happen with heavy sour kind of bunkering fuel for global shipping fleets. And what we've seen is that a lot more of those large ships have been installing scrubbers that enable them to buy the cheaper feedstock of high sulfur fuel oil versus the low sulfur kind, which is

additionally refined and much more expensive because of it. But because of this, relative to say, you know, at the end of 2023, when the heavy sulfur crack spread was

was out around more than $20 a barrel under negative. So there's always trading a negative. So it was you were losing about $20 a barrel to refine a barrel of Brent into fuel oil at the end of 2023. And now, you know, as of recently, that was more like four and a half to $5 of loss. So fuel oil, because it's always a residual product, will almost always trade at a

negative crack spread to crude because you're refining the barrel with more expensive diesel and gasoline, et cetera. And that this leftover is, you just wanna lose as little money as possible, but we're getting pretty close and we actually have seen the European market

kind of fuel oil is briefly traded premiums to crude, which again, I think speaks to this ridiculously tight, heavy, sour end of the market. Now, you noted that, yes, you know, the Trump administration, I was joking at one point that he must be like, you know, he must have hated like a coking refinery owner at some point in a past life.

because he just wanted to do everything he could to basically reduce the supply and thus increase the value of heavy sour feedstock.

And that, I think, is really continued. So as you noted, Iran, Venezuela, there were briefly threats of tariffs against Mexican Maya crude as well as Canadian crudes. But also all of this, you also have the effect where Canada is by far the largest single supplier of this kind of grade of crude, both to the United States specifically, with more than 50% of total imports. But

globally as well. More and more of that feedstock is now shifting to the Pacific Basin and away from the United States in a way that we've really never seen before. And there have been a lot of reports written recently that over the past couple months, you've actually seen China overtake the United States as the largest offtaker of Western Canadian barrels coming out of the new Trans Mountain Expansion Pipeline. So that was always part of the plan and the sales pitch for TMX. But...

after it was immediately started, a lot of those barrels went down to the kind of LA refining area where they were displacing, you know, other, other Latin American grades or whatever. But now more and more of those barrels are making that longer voyage across the Pacific into largely China. And I think now you're seeing for the first time when I've really been following the entire oil market, Canadian oil is now almost 10% of it is going towards Asia versus, you

For the entirety of the time I followed it, it's been like 98% going to the United States. So it's still obviously 90%. We're never displacing the US market for Canadian crude, but you are beginning to see like legitimate diversification enabled through TMX, which I think is an interesting development. And now following all of the...

kind of the back and forth and kind of animosity between the Trump administration and Canada at the beginning of the term in particular with the tariff threats and the kind of quasi annexation threats. You've seen the politics in Canada change in a way that I've also never seen. For reference, I am Canadian and I'm sitting here in Toronto and we're seeing Quebec, which has always been a province that has opposed pipelines vociferously.

is actually now like 78% in favor of a pipeline that would travel through Quebec. That is just something I would have never, never hoped to see in my life. So you've seen this kind of pivot around not just supporting Canadian, you know, Canadian economy and kind of diversification, but yeah, but specifically diversification away from the United States and kind of building in some optionality. So now the newly elected government of Mark Carney has been pushing through a lot of new legislation to fast track,

major projects like pipelines and the liberal government, the government which under the previous kind of premiership of Justin Trudeau was, you know, while they built TMX, I think rhetorically, emotionally, symbolically, they were as opposed to the oil sector kind of as any government in recent history. That I think that tone is changing in a way that I think is quite unique. And again, I wouldn't have expected even a year ago.

Rory, final question before we close. Let's come back to this supply and demand question. I'm still concerned that when the U.S. shale play plays out, that the world is going to be in trouble. I'm not sure that it has played out yet, but someday when it does, I'm going to be in trouble.

I don't see what comes next. What might I be missing? What is there beyond U.S. shale to make up the difference as far as spare capacity if we do eventually get to the point where shale is played out and we don't have the ability to increase production in the U.S.?

Also, I do want to say one quick thing on even the US side is I should note that this EIA forecast, and I think my expectation as well, that we begin to see a rollover in US crude production is very much a function of us kind of being in the 60s or if not the 50s for crude prices. I think if we were

in a $100 a barrel environment again, U.S. crude would be growing kind of gangbusters. I almost guarantee it. I don't think that this is necessarily a kind of geological fait accompli. I think that this is a question of economics. So this is how OPEC, I think, got in over its head. It kind of drank the Kool-Aid that U.S. shale is peaking so they could keep the market tight.

But then when they kept the market tight and prices in the 90s are $100 a barrel Brent, you still saw U.S. shale growing. So now they're kind of reversing course, trying to kind of add more supply to the market, bring their kind of implicit target price down. And I think that is itself doing what they need to do, which is basically capping out U.S. shale production.

I think what's also interesting when you look at the IEA, just the International Energy Agency, just released its new World Energy Investment Report for 2025. And one of the things that it showed was that you're actually seeing upstream investment and kind of global oil production fall by about 4% to a combined, again, this is including natural gas, but falling to a combined $570 billion in 2025. That obviously sounds like a lot.

But relative to, say, 2015, that was almost $900 billion. So it is it is down considerably. And when you look at that's about a 4% decline. But when you look at the fact that costs are increasing, for instance, you know, the way tariffs are increasing the cost of steel, which itself accounts for 10 to 20% of US like a US oil well.

We're actually seeing more like a 4% decline in investments, more like an 8% decline in cost-adjusted activity, which I think is itself a pretty notable pullback. But I think outside of the United States, more of the non-OPEC production growth, I think, is slower moving and stickier, far less price sensitive. You're looking at things like Canadian oil sands, which as long as there's egress availability, you're going to keep gradually expanding those fields, not...

a brand new project, but brownfield expansion of Institute Fields in Alberta. You're also continuing to see the ramp up that really almost no price could derail of Guyana. They're now accepting well over a million barrels a day of production by the end of the decade or even before that.

And Brazil as well. You're seeing a lot more supply there. These are all prices that these projects will break even in the kind of $30 to $40 barrel level, far, far slower moving and kind of much stickier investment. So eventually, if these prices persist,

that will begin to wane. And then you're basically left with a growing call on OPEC, which is what they hope. But I think for now, the only way we're going to get that tightening and that kind of forcing mechanism on the other side for prices to increase, I think, is if we have...

demand growth reaccelerate in order to kind of force that. Because if demand's only growing by half a million barrels a day a year, that's just not enough to accommodate for some of those slower moving sources of supply growth in the Americas.

while at the same time kind of making any room for OPEC to return its own barrels as it's planned to do. The only way that that could work is if you had even lower prices and even steeper declines than are currently expected in the U.S. shale patch, which again...

Again, I have a lot of feelings at the current oil market, but I think I could see it resolving itself either way here, depending on where demand in particular goes. And on the supply side, how much OPEC is actually physically going to push into this market rather than what they just say they're going to do. Because so far, everything on the headline level, the paper balance is extremely bearish.

But the physical balances haven't caught up to that reality yet. And it doesn't look like they're trying to catch up to that reality. So something's got to give. Because as we started with talking about this really, really weird futures curve, that futures curve structure fundamentally can't persist for very long. Something's got to give. Either the front of the curve has to dip into contango and the rest of the prophecy be foretold, or...

It basically, you know, the speculators and the forecast of the market need to revert to kind of flip back up through the belly. And then you have that broad backwardation re-established. But this kind of weird smiley checkmark thing, it fundamentally can't last. It's a fundamental market structure that doesn't really make much sense.

The square root symbol term structure is unprecedented. Well, Rory, I can't thank you enough as always for a terrific interview, but before I let you go, please tell us a little bit more about what you do at commoditycontext.com, what people can expect to find at your website and how they can follow your work. Thanks so much for having me, Eric. So again, I'm the, I'm the founder of commodity context, which is my analytical platform for oil market analysis. I cover crude, refined products, uh,

political developments and policy developments in the States, particularly in North America, particularly in Canada where I'm based.

In terms of the actual, you know, product I publish, I have three different types of reports. I have a weekly report I publish every Monday at 4 p.m. Eastern. I have thematic reports. I should have one coming out over the next day or two on this weird curve structure. So look forward to that. And then I also have three different monthly data decks or kind of heavy data reports where I update things like global balances and try and kind of rationalize all of this narrative back to numbers that we can confirm. And beyond that, I also teach at the University of Toronto.

and the Master of the Will Affairs program. And you can follow all of my work largely on Twitter at Rory underscore Johnston or at all of my work at Comarty Contacts at ComartyContacts.com. Patrick Ceresda and I will be back as Macro Voices continues right here at MacroVoices.com.

Now, back to your hosts, Eric Townsend and Patrick Ceresna. Eric, it was great to have Rory back on the show. Now let's get to that chart deck. Listeners, you're going to find the download link for the postgame chart deck in your Research Roundup email. If you don't have a Research Roundup email, that means you have not yet registered at MacroVoices.com. Just go to our homepage, MacroVoices.com, and click on the red button over Rory's picture saying, looking for the downloads. Okay, Eric, we're going to get to that.

What are your thoughts here on equities? Well, Patrick, I don't have a strong view on whether there's another wave of markets drifting to still new, you know, all-time higher highs or if we're maybe ready for a consolidation or a pullback.

But I do have the view that if the VIX continues to get cheaper, out-of-the-money left-tail hedges on third-quarter S&P risk should get cheap enough, at least out of the money, to load up on in case Trump and Besant have only shown us the first act of this play so far. And I wouldn't be surprised if that's the case.

Well, Eric, let's frame this more on a technical short-term basis. Now, over the last two months, we had like a 1,225% rally that has taken the market from being extremely oversold to being quite overbought.

For instance, we were very close to being 300 S&P points above the 50-day moving average, which is very much a typical sign of a short-term overbought condition. Not necessarily a sign that an imminent crash has to happen, but simply that the upside has been stretched and markets often consolidate after those periods. This is at the time when you can see on the chart on page two that

We have the S&P approaching those December of last year and January and February highs. And so there's a substantial overhead resistance at a time when the market's overbought. So first thing that we want to conclude is that there's very little asymmetry in buying new positioning here in the market.

We're overdue for some sort of a mean reverting correction and it's best to buy dips as opposed to buying into overhead resistance. At any one moment, we're likely to get one of these 5% market corrections, these 200 to 300 S&P point drops that would be a direct test of the 50-day moving average.

And so I think that that is the most imminent move and what catalysts, maybe it's the FOMC next week or something like that, that could end up being the trigger to bring in some of that distribution. Now, does that mean that there is going to be a bigger market drop? Well, maybe we can look at something deeper into the third quarter that we could have something more ominous. But

My first positioning here is that when we get this correction, it will be bought on dip. And so if we have this, that could also be driven by, for instance, there's the infamous JP Morgan whale trade out there, which is all open around the 5900 strike.

with billions and billions of dollars of notional out there that is going to be like a magnet to this market going into the end of June. So us pulling back a couple hundred points and gravitating towards that strike is going to make the rest of June likely to be rather boring and inactive from an S&P index perspective.

Now, after that, there could still be a summer rally, retesting highs, all these different things. And then the market will assess from there as to whether it's going to start to roll over from there. So at this moment, we are not buying anything new. I don't think there has to be any aggressive hedging. The VIX is growing.

Very close to 17 handles. So there's still room for a little bit of ball contraction to be occurring during bull phases. But overall, this is not a level to be buying. All right. So let's let's move on here and touch on the dollar.

Well, we're consolidating here between 98 and 100. I do expect further weakness. I think we are in a new structural downtrend in the dollar, which is by design and desired by President Trump and Secretary Besant. I think they have the tools they need in order to get what they want.

Expecting further weakness is definitely the path of least resistance. It is the primary trend. This has been an incredibly distributed chart. Uh, every rally is failing, uh, and distribution is dominant. It's been, it's been below its 50 day moving average consistently for the last five months. And so, um, this trend, uh, is definitely down. Now we are trading at the April lows. Uh,

and the market is incredibly oversold. The question here becomes is that will this behave almost like a technical double bottom, a support line that could have the dollar find that support and trade back to the top in the ranges. And that's without making a bull thesis simply that is the dollar now far more going to be trade range bound and the support holds here.

Or is there another full leg down? Well, a full leg down from a measured move perspective would see the 95 level being tested on the Dixie. Now, that's not actually my favorite scenario, but if we break to a lower low, that is 100% the target.

But if I was to be pressed as the most probable, I still think that the dollar is so grossly oversold that a bounce off the support line back toward $1.0102 and that a trade range into the middle of summer will prevail is the base case that I have here. And that makes the dollar quite inactive unless you're a trader.

day trader or swing trader looking for a couple hundred pips swing in a currency for a quick trade, I think the dollar here is much more likely to be boring and trade range bound for the interim until later in the year when something more ominous can get underway. All right, Eric, let's touch on that crude oil.

Well, obviously, the feature interview covered all the fundamentals. I just want to note that that was recorded Tuesday afternoon, so we were obviously not aware of what was to come on Wednesday. If you include the futures reopen at six o'clock, we saw at one point more than five dollars of upward price action during the course of

the day on Wednesday. And needless to say, that was a result of growing concerns about geopolitical escalation in Iran. Patrick, as our resident technician, what do you see in the charts? Well, over the last couple of weeks, Eric, I've been talking about the double bottom technical formation that has basically seen over the month of April and May,

have oil still in a primary downtrend, but showing signs of the price action being defended and even quietly accumulated. We were identifying that if we got a legitimate breakout above the 50-day moving average out of the flagging formation, that it could drive a bit of a short squeezing to the upside as much of the trader positioning is either short

crude oil and or being out of the market altogether. And so that usually spurs some sort of a covering and chase to the upside when a breakout like this happens. It just so happens that, uh, the Iran news and geopolitical escalation, uh, was now the trigger point that has caused that. Now that we've seen us, uh, print $69, uh, on the upside, uh, before fading a little bit off the high, the question is, is there more, uh,

on that upside. Well, if we look at that chart on page four, we can see that all of the second half of last year had the consolidation lows in this 68 to $72 trade range. So now we have literally came and tested what were all of previous support lines

And the question now is, does that act like overhead resistance? Will oil struggle to reenter that trade range? And will sellers ultimately fade this rally and send it back in the trade range? Well, I'm not structurally and fundamentally bullish oil. I just thought it was incredibly oversold and due for one of these types of squeezes.

I, uh, at this moment, now that the squeeze has happened and the money's been made, I'm taking a little bit of a neutral stance where sure, this thing could squeeze to 70, 72 on the upside. Um, but, uh, I wouldn't be buying new positioning on oil, uh,

after this rip has already gotten underway. All right, Eric, let's touch on gold. Well, Patrick, this gold bull market has definitely been feeling a little more sluggish in terms of the pace of the rallies in the last few weeks. Obviously, that's changed as a result of the geopolitical escalation in Iran. Now, all of a sudden, gold's taking off to the upside as of recording time. We didn't know whether there was going to be a strike on Iran or not, but

In case there is one, gold is definitely reacting accordingly. I wouldn't be surprised if we're just setting the stage for something that won't happen until the weekend. So we'll probably see more strength in gold going into the weekend if that's the case.

In any event, I hope that we don't get too far ahead of ourselves and break out to new all-time highs too quickly. Again, we were getting a little bit ahead of ourselves before. The risk here is, of course, a technical bounce in the Dixie, which is totally possible looking at the Dixie chart. A technical bounce in the Dixie could result in another wave of weakness for gold. But I think it's definitely likely to resolve to the upside as the dollar resolves to the downside longer term.

Well, Eric, we did get a key breakout attempt in gold that got it trading right back up towards those April and May highs. That has now spurred this one-week consolidation. Now, this consolidation has done nothing bearish. It's just pausing.

Uh, but overall we're trading up along major highs and all we need is one, uh, bullish catalyst to break out, uh, above those April, May highs. And we still have that 36 to 3,700 target on the upside in play. What is in fact continuing to actually support this is that we've now actually gotten broader precious metals participation when we can, uh,

What I want to observe, and we talked about it over the last few weeks, was the breakout in silver, platinum, and platinum.

Palladium. And so just to review the charts on platinum on page six, and you can see that we had over a 20% ripped the upside in literally just a few weeks as the platinum market has just blasted off. Palladium is looking great. And that silver chart on page seven, you can see has broken to

mere highs and the consolidation while it's paused here is actually holding at higher highs. So we have technical bull trends happening in a lot of the precious metals outside of gold. And so this in my mind actually supports the idea that gold can still break out above this key overhead resistance. And I still think remaining bullishly biased here is the path of least resistance.

All right, Eric, what are your thoughts here on uranium? Patrick, I think we're at a very important fork in the road for this uranium bull market. Some of my uranium positions have doubled since the April lows. Oklo has more than tripled since the April lows. So clearly it's game on for this uranium bull market. But spot uranium prices have barely even moved yet. They're up less than $10 off their lows.

My base case is that spot uranium is going to move. And when it does, I predict that this bull market will accelerate to the upside. Think about it. The one big thing, the one big objection that the bulls don't have a good answer to is how come the spot price has been stuck so low for so long. And of course,

Everybody that's in the know understands that the term price is what really matters, and it hasn't been that depressed. It's been holding steady at more than $80 for this entire market cycle. But the spot price hasn't moved yet. When's it going to move? That's the question that nobody can answer. Until that question is answered, there's been a huge amount of hesitation that's preventing people from going online.

all in on this bull market. I think once we see that movement in the spot price of uranium, people will go all in. We'll see another big wave of buying. Prices will move much higher. And on one hand, I could tell you I don't think this risk scenario is going to happen because I really think that the spot price is going to move to the upside. But frankly, I thought it was going to move to the upside for the last year, and it didn't.

So what if the spot price doesn't move up? Well, that could be what spooks the market and we say, oh boy, we got ahead of ourselves again. And we see this is another false breakout to the upside and we're back down to filling those gaps.

which I frankly would prefer as an outcome because I'd like to fill those gaps before we move higher. I don't think that's the base case. Again, I think the base case, the most likely case, is that we do see spot uranium move higher. And once it's moved measurably higher, I think it's really going to be game on for the equities at that point. I'm hoping that we get a correction first, but it's looking less and less likely as this market develops.

So bottom line, we're at an inflection point, a pivot point where we're either going to accelerate this rally to the upside or reverse it hard into a correction. And it's going to depend on whether or not we see a material move to the upside on spot uranium prices.

Yeah, Eric, your assessment is spot on. The interesting thing that continues to be is that divergence between the Sprott Physical Uranium Trust, which is reflective of spot prices of uranium versus the way that uranium equities have been ripping. Now, those equities have had an extraordinary move, but we haven't seen actual uranium prices yet confirming that.

which really to me does suggest that if this re-engages a new bull market, that this is still got lots of room to make money. Now, on the equity side, we obviously at any one moment can have a retracement, let's say 25%.

to 38% retracement of the advance to create a new buying opportunity. But watching whether or not the Sprott Physical really can get underway and we see, let's say, that U308 finally gets

get some momentum off of 70 on the upside and get going, it will certainly confirm that the uranium market has ended this one plus year bear market that has really made it incredibly sluggish and boring and really could see another new bull market really gain some traction in the coming year. Patrick, before we wrap up this week's show, let's hit that 10-year Treasury note chart.

Yeah, Eric. So we have that chart here on the 10-year U.S. government treasury yields, which are around 440 at the time of recording.

Overall, the yields have been stable at the 10-year. The particularly interesting thing is actually how they're divergent from the actually far more bearish 30-year bonds. The 30-year bonds look like they're almost setting up for a breakout to brand new higher yields for the decade. Just an extraordinary setup to see whether it happens. And the question is, does that spill into the 10-year government bond

where that finally makes that breakout back towards the 475 highs and even starts to press toward that 5% handle on the upside. Right now, the bond market still looks really rough. And that question becomes, when do the rest of the markets start to care if we start seeing those yields press higher?

And the final thing I wanted to touch on is the two-year U.S. government note futures. This is looking at the actual two-year futures itself. And this has been consolidating for three months as there really is a market that is just anticipating when does the FOMC start to back away from their short-term wait-and-see strategy.

to that one of that they are going to be accommodative and potentially be pricing in more cuts. To me, this remains a very asymmetric trade in a sense that I feel that if you're in these two-year U.S. government notes, there isn't too much that could happen or that has any reasonable probability that could drive this substantially lower while there's plenty of things that could

could get underway that could spur the Fed to have to accelerate the path of rate cuts. One, it could be a change of the Fed chair next year. It could be something breaking in the plumbing of the system, forcing the Fed to accelerate the easing cycle. It could be some sharp turn in the economy that no one was expecting. And to me, therefore, there's so many things that could cause this to

year to rip and at the same time very little downside risk if nothing ends up happening. And so to me, it's a trade that I continue to like here and think that there's potential of this for a hold for the rest of the year.

Folks, if you enjoy Patrick's chart decks, you can get them every single day of the week with a free trial of Big Picture Trading. The details are on the last pages of the slide deck or just go to bigpicturetrading.com. Patrick, tell them what they can expect to find in this week's Research Roundup. Well, in this week's Research Roundup, you're going to find the transcript for today's interview and the chart book we just discussed here in the postgame, including a number of links to articles that we found interesting. You'll find this link

and so much more in this week's research roundup. So that does it for this week's episode. We appreciate the feedback and support we get from our listeners, and we're always looking for suggestions on how we can make the program even better. Now, for those of our listeners that write or blog about the markets and would like to share that content with our listeners,

Send us an email at researchroundupatmacrovoices.com and we will consider it for our weekly distributions. If you have not already, follow our main account on X at Macro Voices for all the most recent updates and releases. You can also follow Eric on X at EricX.

Eric S. Townsend. That's Eric spelt with a K. You can also follow me at Patrick Ceresna. On behalf of Eric Townsend and myself, thanks for listening and we'll see you all next week.

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