The global oil market is signaling a potential shift, as traders and analysts worry about reduced crude demand and an oversupplied market in the coming months.

After months of strength, crude futures are flirting with lows not seen all year as top oil consumer China enters additional COVID-19 lockdowns while central banks hike interest rates to combat inflation.

Front-month global oil prices in the last week have traded weaker than future-dated contracts, while prices for physical crude grades throughout the world have declined, market participants said.

“Differentials are confirming what outright prices have been implying—there is a demand deficit and/or supply surplus,” said Tamas Varga of oil broker PVM.

The murkier environment comes at a fraught time for the market. On Dec. 5, a EU ban on Russian crude imports is set to start, along with a plan by the G7 nations to force shippers to comply with a price cap on Russian oil sales.

Meanwhile, OPEC+—the grouping of OPEC and allied producers including Russia—is set to meet to consider output levels on Dec. 4.

The changes are evident in the market's structure - a comparison of near-term versus longer-dated contracts. In the last week, crude futures contracts have flipped in and out of contango, where the prompt price of a commodity is lower than the future price, which suggests short-term weakness.

The front-month U.S. crude futures contract traded as low as 38 cents weaker than the second-month contract, the weakest differential since November 2020, Refinitiv Eikon data showed. The front-month contract for the Brent international benchmark traded as low as 6 cents below the second-month, the weakest since August.

The inter-month spread for December and January Dubai swap flipped into contango last week for the first time in one and half years.

Weaker Demand from Asia

In China, traders are worried about oversupply if China and India continue importing large amounts of discounted Russian oil. At the same time, additional COVID restrictions are expected to weigh on demand.

Offers of Angolan and other West African crude oil to China, a main customer, are a barometer of physical crude demand from the country. China’s Unipec, a major world oil trader, offered for sale several cargoes of crude shipments set to load in December, in a rare sign of slackening interest.

Meanwhile, Norway’s Equinor this week offered a cargo of Angolan Pazflor crude for a discount of $2.50/bbl to dated Brent, down more than a dollar in a week. Spot prices for crude out of Oman—a key supplier to China—have fallen to 82 cents over Dubai crude from as high as $15.06 a barrel in early March.

Oversupplied

Oil storage in several regions is building, said Norbert Rucker, head of economics and next-generation research at Swiss wealth manager Julius Baer.

In addition, European refiners have found themselves oversupplied with crude as an expected shortage owing to the looming EU ban on Russian oil has yet to materialize.

The premium for North Sea crude Forties to dated Brent reached an all-time high of $5.40 in July, but has narrowed sharply to just 75 cents this week. Forties usually sets the value of dated Brent.

In the U.S., WTI Midland prices have weakened to just a 20-cent premium to crude futures, falling from a premium of more than $2 about a month ago. That’s even though inventories at Cushing, Oklahoma, a key storage hub in the U.S., are at a two-month low.