Alright. Check this out. The cost of oil at a future date is equal to the cash price I can procure the liquid today plus the total logistic costs to that future date which includes storage, transport, insurance, etc. The curve is indeed pricing $20 oil, in fact, it's pricing about $15 oil. That is not to say that prompt EVER has to trade to that level. It's saying that if you buy $30 oil today and hold prompt price steady at $30 for say the next 12 months and you have to pay $10 in carry then that is the same thing as paying $30 today with no carry costs where prompt trades down to $20. You can't ignore the carry like it's incidental. The carry represents almost 50% of the price of oil 15 to 18 months out! That is HUGE! Can you imagine buying oil at 120 with a 60 dollar carry for a year? LOL. You need to think about this. The market is penalizing almost half the cost to store a commodity holding prices flat! Heaven forbid 12 months from now prompt is trading 20 and you spent 20 to store it. You could actually lose more money then the oil was originally worth. Just think about that for a minute.
I read the cost of carry for oil is $1-$4 per barrel per month, where the lower end of the range applies when you own the storage facility vs paying more to rent storage. The cost of carry is generally independent from the price of oil (with the exception of insurance). In this case, there is no incentive to buy and hold the physical unless you have exceptionally low storage costs. So that means the only motivation to buy at current prices is for immediate use. Do I have this correct now?
No, that is not correct. The cost of storage is economically related to the opportunity cost of transferring the oil through time. This means that one who chooses to buy oil now and store it believes the storage option that they own is priced accordingly to the opportunity in time or they would not buy the option. Same is true for the seller. If these do no equilibrate you could arb the oil through time.
https://rbnenergy.com/the-downward-spiral-why-the-recent-crude-price-collapse-was-unusually-severe Great article if you guys want to learn more about the forward curve and what's going on in oil right now.
Mav, thanks for link. It's a good summary of the oversupply and price impact. Not sure if their analysis of WTI vs Brent reflects a strong fundamental relationship between WTI and Brent, or if they are just two futures curves in the larger energy sector. In recent years, these two markets have become decoupled and are more geographically separated as North America has assumed a greater role in its own energy production. Does the WTI vs Brent relationship really mean anything anymore? Is it worth watching for trading insights? Have you attended the RB energy school? Appears to focus on fundamentals and I wonder if they cover trading the energy futures markets.
how predictive is the curve? it seems to me like the curve could just represent desperate sellers. the same producers selling into the spot market are also selling deep into the curve. but we already knew that the producers are desperate
The curve is NOT predictive. It represents the opportunity cost of moving oil through time. In other words, it's a real market with real prices. It's not predicting something, it IS something.
I've noticed that energy research is widely quoted in the financial press from analyst Adam Longson (Morgan Stanley), Damien Courvalin (Goldman Sachs) and analysts from JBC Energy. Unfortunately, their published research seems to be available only to their clients, which I guess makes sense.