Duly noted. I am looking for a good time to buy some CL Z10 calls. Was hoping to wait until the end of the year. If we start to have contango it'll hurt when I go to buy. Ugh. Thank you for bringing it to my attention though, I hadn't gotten a chance to look at it in depth, but now it seems pretty clear (backwardation moving to contango)
You welcome. I've been trading calendar spread quite some time now, and I think is the best vehicle if you want to trade commodities. I found out that is very important to pay close attention to the cost of carry if you trade this spreads (i.e., the cost to carry a physical asset or finance a financial asset), Inform supply/demand for the commodity, storage cost, financing and convenience yield inform supply and demand, Freights,weather etc etc. When the outright contract move big time (lets say Up) and the spread dont move, then I'll short the spread. And if the spread move big time (lets say down) and the outright contract dont, I just short the Outright contract and leave it for few days. If the spreads moved big time with the outright then it was a fundamental move that will likely continue. Spreads are usually a good indication of where the outrights are headed.
Boon Pickens called the Oil move ,spot on a few months ago. Oil was not strong enough nor will it be this year to push through 100. The closer that target was met, the smart money rolled out of their longs. I wouldnt' call this a shorting period, more or less a profit taking period. Oil will retrace to its highs...thats a guarentee. When, is the question. Much like the history of commodittes, once oil push and breaks the 100 market, theory has it.....oil will shoot up to 130 or higher. Look at all your commodittes that have traded pass the 100 market for the first time....You may find a pattern.
Over the medium/long term i agree with you 100%. In contango, futures prices for a given maturity date are falling. In normal backwardation, futures are rising. backwardation and Contango are just the pure form of supply and demand. As the contract approach maturity futures price must converge toward the spot price If they don't converge on maturity, anybody could make free money with an easy arbitrage. When the crude went up 10 bucks last month, the spread barely move. It trade between 1,20 and 1,40 during that week. Its was clear that those 10 dollars rally in crude was based on pure especulation. When the Crude lost ground, then the spread went down almost a full dollar in just 2 or 3 days, its a big move for this spread in just few days. so i dont think its just 100% "profit taking", I think that we have a very real fundamental reason for this drop. The Feb/March spread is losing ground big time too. At the moment of this writing, The crude spread (Jan/feb) has just entered in Contango, trading at -01, That's means the supply is bigger than demand. So probably i will short the QM this morning. BTW: the January contract has 9 days left only. have a nice trading day (to all).
The market drop 98 cents between 2:30 am and 5 am (my trading hours), now is up $1.20 because the houston ship channel shut down their operation due weather problems. BTW: we're back in backwardation by 17 cents. also its seem that some traders are taking profits on crack spreads consisting of long products positions versus short crude oil. other traders seem focused on what the Federal Reserve will do with interest rates at this week's meeting. A reduction in interest rates could weaken the dollar further, thus supporting prices.