Crude Oil Term Structure flashes a potential warning sign

Key points

• The Crude Oil Term Structure has crossed above 1.05, a condition that historically flags impending weakness and trend exhaustion across the energy sector.
• When evaluating data strictly from the last 15 years, this specific signal has yielded dismal forward returns for crude oil, characterized by a 15% win rate and double-digit average drawdowns over a six-month horizon.
• This bearish momentum bleed extends across the broader energy complex, heavily suppressing forward returns and win rates in unleaded gas, heating oil, and natural gas futures.

Crude Oil Term Structure

The term structure of crude oil futures tracks the price relationship between the near-term futures contract and a contract further out on the curve. When the ratio climbs above 1.0, the near-term contract is priced at a premium to the further-out contract-a state known as backwardation. Sudden, extreme spikes in backwardation often serve as a contrarian indicator, flagging impending market weakness. Conversely, a reading below 1.0 indicates contango. Severe contango reflects deep stress within the market and typically only materializes when crude oil is in the process of forming a durable, long-term bottom.

The chart below highlights all historical dates when the Crude O