Oil Market Faces Uncertainty: Contango, Shale Slowdown, and Geopolitical Tensions
The oil market is grappling with a complex web of challenges, including the prospect of a contango, a slowdown in shale production, and heightened geopolitical tensions. These factors are collectively casting a shadow over the industry, with potential implications for global energy markets.
Contango and Shale Slowdown:
The looming specter of a contango is haunting the crude oil markets, with the 2026 WTI futures curve trading below $60 per barrel, a price point that falls below the breakeven levels for most new shale wells. This scenario could significantly impact U.S. shale output, with TotalEnergies CEO Patrick Pouyanné and Vitol's Russel Hardy warning of a potential 200,000 to 300,000 barrel per day reduction in production next year. This reduction in supply, at a time when demand is stabilizing, could have far-reaching consequences for the market.
Backwardation Fades:
The backwardation, a feature of the sanctions-impacted years of 2023 and 2024, has now largely faded, extending only until February 2026. The November and February futures contracts are separated by a mere 70 cents, indicating a narrowing backwardation trend. While ICE Brent futures show a similar narrowing, there's still a significant difference between Dated and ICE Brent, suggesting pockets of physical strength for November-loading cargoes.
Market Movers:
- US LNG Developer Venture Global: Reached an arbitration settlement with China's Unipec over a failed delivery under a 3-year fixed-price contract, avoiding a BP-style arbitration litigation.
- Canadian Oil Producer Strathcona Resources: Formally abandoned its hostile takeover bid for MEG Energy, paving the way for a potential MEG-Cenovus merger.
- US Oil Major Chevron: Close to signing an exploration deal with Greece to develop deepwater blocks south of Crete, with surveying set to start in 2026.
- UK-based Energy Major Shell: Greenlit the development of the HI offshore gas field in Nigeria, estimated to cost $2 billion, alongside Sunlink Energies.
Geopolitical Tensions:
- US-China Trade Tensions: Resurgent trade tensions between the US and China have dealt a blow to oil sentiment, with President Trump's reimposition of 100% import tariffs from November 1, 2025, posing risks to the global economy in 2026. With backwardation at its shallowest since January 2024, ICE Brent at $62 per barrel may be a temporary level before a significant slide.
- OPEC Outlook: OPEC downplays the danger of a supply surplus in 2026, maintaining its demand forecast for 2025 and 2026. If OPEC+ keeps production at September 2025 levels, balances would remain in deficit.
- Saudi Arabia's Algeria Deal: Saudi Arabia's Midad Energy signed a $5.4 billion contract with Algeria's Sonatrach to develop oil and gas fields in the Illizi Basin, with a 30-year production-sharing contract.
- Iraq's OPEC+ Quota Review: Iraq's Prime Minister Mohammed al-Sudani called for a formal review of the country's 4.43 million b/d OPEC+ production quota, citing reconstruction needs and population growth.
- Kuwait's Offshore Discovery: Kuwait Oil Company made an offshore gas discovery with the Jazza exploration well, spanning 16 square miles and estimated to hold around 1 TCf of natural gas.
- Sanctions Impact: US sanctions on the Rizhao crude oil terminal have prompted China's Sinopec to divert cargoes, seeking alternative ports.
- India's Hydro Generation Plan: India's power planning authority launched a $77 billion expansion plan to move hydro generation away from the Brahmaputra Basin, as Beijing could cut dry-season flows by 85%.
- China's Rare Earth Exports: Chinese rare earth exports fell to 4,000 metric tonnes in September, a 31% decline, as Beijing tightens controls on flows to Western buyers.
- Australia's Mineral Deal with US: The Australian government is considering mandated floor prices for critical minerals, a $800 million strategic metal reserve, and joint funding of mining projects with the US.
- Argentina's LNG Facility: Argentina's YPF signed a final technical agreement with Italy's ENI to build a 12 mtpa LNG export facility, aiming for a 2029 start.
- US Feedgas Demand: US LNG feedgas demand hit a new record above 18 BCf/d, boosted by the return of the Cove Point LNG terminal and Plaquemines LNG.
- Egypt's LNG Diversion: Egypt deferred Q4 LNG cargoes to next year and resold 4-5 prompt cargoes to Europe due to lower demand, high inventories, and increased domestic supply.
- US Shipping Rules: The Trump administration threatened port fees, sanctions, and visa bans on countries supporting the IMO's Net-Zero shipping framework, as the UN body meets to discuss it.
- Brussels' UAE Deal Approval: The European Commission is set to approve ADNOC's $17 billion takeover of German chemicals company Covestro, after adjustments to ADNOC's articles of association.
By Tom Kool for Oilprice.com
