Investors brace for a glut of oil

The latest: Spot prices for Brent crude oil — the global benchmark — and U.S. West Texas Intermediate have tumbled over the last three months.

• WTI is down roughly 39% to less than $70 a barrel, and Brent is about 33% to under $73.
• The fine print: Those spot prices, which measure the cost of buying oil for near-term delivery, are now lower than the costs of buying futures for delivery over the next few months.
• Such a state of affairs, with lower prices today and futures prices that rise over time, is known as "contango" and is considered normal for oil markets.

Yes, but: The outbreak of the war in Iran upended that status quo, as short-term oil prices leapfrogged longer-term futures.

• This market phenomenon, known as "backwardation," signals extreme anxiety among buyers to get hold of crude immediately.

The big picture: The return to contango underscores how rapidly both the supply and demand have changed for oil, even though the war between the U.S. and Iran is far from officially resolved.

• Since the memo of understanding extending the ceasefire was signed, more tankers have started to move out of the Persian Gulf, and Gulf states have shipped more crude than expected.
• The OPEC+ oil cartel, meanwhile, has announced a plan to boost production.
• Simultaneously, more Russian crude is hitting the global market as Ukrainian refinery attacks forced Russia to divert supplies as exports.

The other side: That's all about supply. But analysts say demand — which has been much lower than expected recently — is just as important to explaining the drop in prices.

What they're saying: "China has radically reduced its oil imports," Gregory Brew, an analyst covering energy markets and Iran for the Eurasia Group, tells Axios. "Before the war, China was importing an average of 10 to 11 million barrels per day. That level has fallen in the last two months or so to around 6 million barrels per day."

• "The recovery in Middle Eastern supply is outpacing our initial expectations while Chinese-depressed import demand remains weak," wrote energy analyst Rory Johnston on his Commodity Context Substack.

The intrigue: "No one knows exactly why China is doing this," Brew tells Axios.

• During the war, China surprised investors with its ability to drastically reduce imports while avoiding major economic damage. Its resilience suggested that the Asian behemoth had far more reserves than was understood before the conflict.
• Now, with oil prices much lower, China was expected to restart making major monthly purchases to replenish those stockpiles.
• It hasn't.

What to watch: Given the uncertainty around China's return to the market, investors seem unsure if the current soft prices for crude will last.

• The quality of the crude market contango — which is now limited only to the next few months — could offer some clues.
• "If the market was looking at a structural oversupply, you'd see a more durable flattening of the curve, and more months of contango," Brew says, suggesting that, for now, the market expects Chinese buying to return over the next year.