Oil curve: why so much daily change in shape of forward curve?

Discussion in 'Commodity Futures' started by m22au, Jun 10, 2011.

  1. m22au


    Just wondering if an energy guru can help me with some queries regarding the shape of the CL ($WTIC) oil futures curve.

    Thanks in advance for any help you can provide.

    August CL is about 50 cents more expensive than July,
    September is about 50 cents more expensive than August
    October about 35 cents higher than Sept
    Nov about 35 cents higher than Oct

    yet December 2012 is only about 80 cents more expensive than December 2011.


    Also, yesterday when CL rallied, the front months went up by more than the later-dated months. Yet today when CL is falling, the opposite is true. I see that the low in the December 2011 contract in March 2009 was at about $57, yet the front month at the time was in the low 30s.

    So why are the front months so much more volatile than later-dated months?

    Why is the (annualised) difference between near months so much more than the annualised difference between far months?

    Q3: (related to Q1 above) December 2011 is at about 102.70, yet December 2015 is at about 100.60. I understand that Dec 2011 is at a premium to the front month due to storage costs, but then:

    Why is December 2015 lower than December 2011, with 4 extra years to store?
  2. It is very interesting isn't it!

    WTI seems to almost pivot at times as you note - when front months fall a lot in a day, contracts out a few months fall very little, in fact less than they should relative to how much Brent falls that day. I assume that this means that some market participants are trading the momentum of the spread itself, ie. selling the front and buying the deferred in this case.

    I am planning on trying to do a systematic study of these patterns to identify the best trades.

    Also I notice that some very inefficient fills are sometimes taking place in distant months. Presumably one could watch for these and take the other side.

    Like you, I have also noticed that after you get out a couple of years, the WTI contango changes to a backwardation.

    This makes it attractive to place long spread legs out that far, as they will presumably tend to rise with time, rather than fall. They are basically not sensitive to whatever short-term phenomenon is responsible for the short-term contango in WTI (but is not affecting Brent).

    The term structure of Brent changes much less from day to day, almost not at all compared to WTI.

    Just to be clear, I am new to this also and am not claiming any expertise at all.
  3. 1) At that time, there had been "panic-selling" in the front-months but "orderly selling" in the deferred months. That gave rise to traders buying tankers to fill with oil and then short-hedge with the deferred contracts trading at a wider premium to the front-months.
    2) The front-months are more volatile because of excessive speculation. That's where the "hot" money is. Commercial hedgers, "cooler heads", tend to be in the deferreds. :cool:
  4. rosy2


    this is the case with all futures. you can't really predict things so far out.
  5. bone

    bone ET Sponsor

    1. In the energy space, the near-term physical delivery dynamics change quite frequently, and the substantial basis changes can be quite dramatic. The fact that most of the futures contracts at ICE and Nymex have physical fungibility issues (storage rack space, barge/tanker availability, pipeline/refinery status) inherent in their design really magnifies the effects near-term.

    Not only does this intensify the vol in the front months, it also blows out the variance in the Brent / WTI differential.

    2. In the interest rate space, the vol is shifted further out in the forward price curve due to duration effects. Look at the forward Eurodollar and Euribor curves.
  6. Could you please elaborate on 2 above?

  7. bone

    bone ET Sponsor

    Longer duration = more trading range; compare the volatility and daily trading ranges for the further dated contracts in the STIRS