influences on the contango rate

Discussion in 'Commodity Futures' started by trading1, Oct 24, 2010.

  1. What influences the contango rate in the OIL market? Is it supply / demand, inventory, time of year, weather, interest rates, the equitys market, or everything? Is it pretty much random or are their indicators that help? Any any insights on this topic appreciated.
  2. benwm


    A good question.
    Not a regular oil trader myself but I'll take a stab at it.
    In theory forward rate should be the spot rate plus the cost of carry (interest plus storage costs)? Otherwise, too much contango should be arbed away, but in practice how easy is it to get hold of some oil and store it away safely somewhere? I'd be interested to know if ET had ever done this and would be willing to share their story... :)

    Back in 2009 when oil was dirt cheap, $35 or so, the contango was really high and everyone started piling up oil on to floating containers in the middle of the sea and selling forward at much higher price. Nice little arb if you have a spare oil tanker in the backyard. So the cost of hiring a ship to stock up on oil, paying security guards to man the ship etc will affect the ability to do this.

    Logic suggests expectations for future oil prices will also play a part regardless of cost of carry considerations - in today's environment commodities are an investment vehicle for many.
  3. Here's a brief lesson courtesy of the CME's which references many elements involved, but clearly not all. OIL has a lot of "moving" parts - Just like everything else :)
  4. bone

    bone ET Sponsor

    Just a couple thoughts that are not frequently mentioned in the discussion:

    One salient point is that most commercials / dynamic hedgers in the energy space like to do strips, and the easiest way to roll your strip is with the calendar spread.

    ETF long/short interest is another factor not commonly mentioned (the Goldman roll) that's good for 45-70K ++ in volume per month.
  5. Hi Bone,
    Could you please elaborate the consequences(of the two points you've mentioned below)?