Discussion in 'Commodity Futures' started by Marsupilami, Jan 26, 2011.
Local... You have really laid a turd in this thread.
Don't think so - correct me if I'm wrong but Local and bone don't actually seem to be in disagreement about anything, they just seem to be arguing for the sake of arguing.
Local is saying the contract is 'broken' because the spread has moved beyond full carry. Bone agrees the spread is beyond full carry (regardless of whether he uses the term 'broken' or not), and both seem to agree there is some basis for the wide spread (no pun intended) since the arb can't currently be realized enough to narrow.
bone - You may be right in that the cost of carry has little impact on the size or reason for the spread, though I am curious as to why you wouldn't recognize this as being 'broken'.
Wasn't this concept of being 'broken' the impetus behind why the CME instituted variable storage rates for the Wheat contract? Couldn't the same argument be made for Oil?
The spread is not broken. The spread accurately reflects a desire to hold products at what is presently perceived as fair value just a few months down the road when demand (the summer driving season, a change in refinery runs from heating oil to gasoline, and some gain in economic momentum later in 2011) is expected to gain against current inventories. Hint: take a look at the entire curve complex and note the volume buildup in months further away in the curve.
For example, here is the RBOB Gasoline versus the Crude Oil future Crack Spread:
The crack spread actually explains why the contange deserves to be so severe; there is only so much refining capacity available to process a monsterous inventory of raw crude we are awash in.
Please carefully review the API/DoE reports, which I reference in the Schork Report exerpts earlier in this thread. With energy, supply and demand trump "carry" every single time. Ask Brian Hunter from Ameranth fame about that carry trade in Natural Gas.
If you only look at situations in one dimension, then you are bound to consider things 'broken' when you can no longer account for the market dynamic.
You find severe Contango in energy markets where the real demand is more distant than the near-term contract - just because storage costs "X" and transportation costs "Y" and finance is "Z" it does not mean that you should fade a market at what you perceive to be 'fair value' at some given price level. Ask any basis trader in the PJM-West Inc/Dec electricity contract or the Transco-Z6 Natural Gas Hub how often "carry" becomes meaningless.
This thread has changed direction, and for to the originator, I apologize. However, I think most readers should be able to take away somethingpoitive. If nothing else,a cheap source of entertainment.
The thread has evolved into a disscusion over
the viability of the crude contract. I, for one, maintain that it is broken as is evidenced by the nearby spreads trading past carry consisently over the past two years. In the other corner is Mr. Bone, who insists that it is not broken.
To start with I will reference Dennis Gartman (for those of you not familiar with Mr. Gartman, he is world reknown as a commodity analyst and often referred to by all media). Gartman was very vocal when the crude spreads started moving past carry two years ago and has consistently referred to the crude spreads and its implications over the past two years. Has consistently called into question the viability of the contract and referrede to as "broken".
Oh yeah, Gartman has been trading commodity spreads for 40 some years, myself for 28, 70 some years combined but I guess we "are in over our heads when we talk about something we've made our living at for 70 some years."
Not broken, really ? Why don't we take a look at it from the perspective from the long, fund or commercial. For arguements sake, assume longs roll positions at $2/month for the next year,plausible scenario given the spreads over the last
two years. A long futures position established today at $90 will
have a beakeven level in a year of $114 or $138 in two years time. An effevtive hedge in a market in which Bone describes as a bear market,"awash in crude" ? Good luck to the long. A license to print money for the short. Why don't you ask the millers how the wheat contract is working ? Oh yeah, they aren't using much anymore, costs too much to roll.
Not broken, really? I challenege skeptical readers to cite commodity spreads that have moved past carry that did not have delivery issues. Go back 30 years. I think I can come up with 10,000 that have defied moving past carry. Bone has alluded to copper and alluminim and some energy spreads but has conveniently neglected to include specifics.
Not broken, really ? Then why are funds liquidating long positions in favour of Brent ? Making too much money ? More likely too cotly to roll. I have traded probably 6 contracts that are no longer listed. This should probably go without saying , but in each case the demise was initiated by a decrease in open interest.Time will tell, but sort of ominous.
Bone has suggested that the spreads reflect supply and demand fundamentals and teh contract is not broken. Really ? Then please explain why the spreads went beyond carry 2 years ago, at the start of a 2 year bull market (not necessarily finished). Please explain why the spreads did not go beyond full carry prior to that when we were in bear markets. Further I will provide you with examples of countless bear markets where spreads did not go beyond carry (see grain markets 1990-2000, and beyond). Bearish fundamentals may move a spread close to carry, but they are not responsible for it moving beyond full carry. A breakdown in the delivery process will.
Bone has alluded to real demand in distant months for spread moving past carry. Really ? If the real demand is for the J at $88 why isn't the market buying the H at $85, standing on it, paying the carying costs of $1.00 and owning the cash at $86 ? By teh way, I thought you said we were in a bear market, why the overwhelming demand for the J ? Conradiction ? The explanation of excess demand in deferreds is extremely superficial, a mistake often made by someone just learning to trade spreads. Absolute garbage.
"With energy supply and demandtrump carry every single time". Really ? what about the bull market that started two years ago and apparently is not finished (read where analysts predicted $150-200 crude this year) ? While you are thinking about that one could you also explain how teh fundamentals were responsible for the Spread tightening up by almost $1 on Friday. Also, could you explain how the fundamentals were responsible for $4 daily moves in the spreads two years ago. Did the fundamentals change that much in one day ? Really ?
In over my head, bone? really? I was in over my head when I was long 50% of the open interest of the nearby
with 2 weeks to go before first delivery at an inverse. Over my head,really ? You should told me that a couple of years ago when my ytd was 1100 %, then I could have made some real money. Over my head, really? I'm the one that is watching the crude right now, you are the one that is trading a "broken " contract and don't even know it.
By the way Bone, why did you leave the floor after only 1 year. From my experience traders only left the floor for one of two reasons;
1) they were dead
2) they lost money
Go figure. Maybe you made too much money . ya.
No problem. I had always assumed that it's the outright futures market where the main action is. I guess for the index futures, this holds true, but not so for the commodities, energies, financials, as it seems.
Holy shite, 300% rise in the gasoline/crude oil crack spread ? I Have been following the wrong markets.
The market is providing incentives that are needed at this time given supply and demand over time, ie consumption vs storage.
Nothing is broken, bone is correct. For example when near term demand dropped of a cliff and short term finance dried up a few years ago a large profit incentive existed to put production into storage. This is precisely how markets should function.
Arguably, Cushing IS broken... I think that's really the only thing one can say with some degree of conviction.
There is def some new dynamic going on in crude.
Whether the NYMEX contract is broken or not I do not know. I have often suspected that the citing of NYMEX exchange open interest figures not being able to support speculation in the market for the 2008 run to $140/barrel as a lame argument at best. My guess that most of the volume in that run was elsewhere/off exchange in some electronic OTC market thanks to the Commodity Modernization Act of 2001. The same congressional act that brought us the CDS boom & bust via an unregulated, nonreported OTC market.
The term "Broken" to me seems inaccurate for the strange spread behavior. I agree by normal future market definitions/conventions, spreads going past full carry is not normal. Def not "acting right". Is the exchange listed contract moving gradually toward being obsolete? Possible. Strange things are a foot.
The important question for here & now is,
Are there still trading opportunities today in the exchange traded spreads.
My guess is a YES. & I think that you would both agree that's what really
matters at the end of the day. Is the picture murky? Definitely.
Local, Bone, thanks for sharing your experience, opinions & insight. If we all agreed on the trade then it wouldn't be a market after all wouldn't it?
PS... I've seen Bone's CV. He was membership on the CBOT for 3 years. There are additional valid reasons for leaving the floor.
3) To be on the other end of the phone. As we all know there is Big money "upstairs".
4) To trade electronic. Locals started leaving the floor back in the late 90's to do that regardless of exchange/contract/profitability. As you know if you're standing in one ring all day you can't follow what's happening in others. Hence, opportunities lost.
"why did you leave the floor after only 1 year"
Local, stop with the personal attacks, and stop making stuff up.
I traded interest rate spreads for my own account on the floor of the CBOT and on Project-A with a Full Membership in the 90's for just shy of four years - I leased my seat from Ray Cahnman and cleared TransMarket Group. I left the floor to take an energy trading position for one of the largest energy companies in the U.S.
I was on the floor when seats leased for $3,800 per month for a reason.
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