Oil falls below US$80 for first time since January: Woodside shares mostly unphased

Oil prices sliced through US$80 a barrel with ease even in the midst of more positive news about China easing Covid restrictions.

WTI crude is down more than 40% from its March high of US$129.4 a barrel and trading 2% lower year-to-date. Likewise, Brent crude is 42% off its March high of $138.03 a barrel and up just 1.0% year-to-date.

Its disinflation before our very eyes.

Brent crude chart (Source: TradingView)

Messy oil dynamics

The confusing thing about oil is that it's tumbling in the face of easing covid curbs in China and the newly implemented Russian oil price cap.

"Must be cool to be a commodity analyst or journalist. For the past 6 months, they told us how the G7 cap will spike oil prices. Prices fall in a straight line," said Robin Brooks, Chief Economist at the Institute of International Finance.

At least from a fundamental perspective, the plunge can be explained by a spike in Russian exports leading into the price cap implementation and oil timespreads trading from steep backwardation into contago, according to HFI Research.

Steep backwardation indicates that spot prices are trading much higher than futures prices, which suggests the price would decrease in the future.

SPR releases and OPEC to blame

"The oil market is tight. Demand for oil exceeds supply coming from oil fields. Were it not for the release of oil reserves from the Strategic Petroleum Reserve (SPR) and OECD inventories and lockdowns in China all year, oil prices would have traded higher this year," said Citi's Zoltan Pozsar in a note on Tuesday.

Zoltan notes that recent SPR releases have brought reserves down to levels not seen since the 1980s. With just 400 million barrels left, the reserves could be empty by spring - in a worst case scenario.

"... the US needs to re-fill the SPR at some point because if it doesn't, it might not be able to control domestic oil prices in case oil gets caught up in geopolitics," notes Pozsar.

So what now

Catalysts to potentially look out for include:

• Progress on China's reopening

• Next OPEC+ meeting is scheduled for June 4, 2023 but an emergency meeting is an increasing possibility amid tumbling oil prices

• Further SPR releases or a potential SPR top up

Oil stocks like Woodside (ASX: WDS) are trading as if oil is still sitting at more than US$100 a barrel. The divergence has only grown in recent weeks. So who's leading who?

Woodside (blue) versus Brent crude (orange)