While it is not meant to sound profound, crude prices at any given time reflect the collective perception of reality. The reason that market research and analysis is an ongoing affair stems from the gaps that develop between this collective perception and what an assessment of supply and demand fundamentals indicates reality will unfold to be. These gaps between reality and the perception of reality are what prove to be the best investment opportunities.

With that in mind, today’s column focuses on the crude oil time spread, which sometimes is referred to as the term structure. We define this spread as the difference between the spot price and the price for delivery in one year’s time — more simply, the spread between the first and 12th nearby crude futures contracts (be it WTI or Brent). Normally, changes in the time spread and changes in the spot price of crude are almost perfectly positively correlated, but divergences do occur.

A situation where the spot price of crude is trending higher but the time spread is trending lower is a bearish divergence. The pattern typically coincides with the formation of interim price tops. We saw such a pattern manifest during the summer of 2008. Conversely, we can see a situation in which the spot price of crude is trending lower but the time spread is trending higher — this is a bullish divergence and it typically presages a price bottom. Last September, we alerted our clients that the time spreads were patterning as such, which jibed with our forecast for the oil market outlook. We did indeed see a price bottom form and oil prices have climbed roughly 100 percent since that time.

What is interesting and notable is that the crude oil time spreads are still in a bullish divergence. This is most unusual. After a rally of the magnitude already seen, time spreads typically transition into a neutral pattern. From a practical perspective, the divergence having persisted means bullish underlying market sentiment is still building up. This happens to square with our forecast for the global oil balance and our related outlook for oil prices. The pattern (and its implications) are running counter to what one might expect, given high frequency reporting about the pandemic and related angst about global economic activity (which, by the way, still appears to be mending).

As a footnote, there is a separate but related discussion to be had about oil prices being in backwardation (the spot price is higher than the long-dated price) as opposed to contango (the spot price being lower than the long-dated price). Much has been written and asserted about these patterns. A price structure in contango typically occurs when there is excess physical availability; backwardation, on the other hand, typically occurs in the absence of physical excess. What we will note today is the fact that oil prices moved into backwardation last November when global oil inventories were still bloated — being 249 million barrels above normal at the time. Like the bullish divergence last September, the oil market having moved into backwardation was another indication that market sentiment shifted into a very bullish disposition. The perception of reality was, simply put, playing catch-up.

• Michael Rothman is the president & founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986.