what does a steep nearby CL contango tell us?

Discussion in 'Commodity Futures' started by dhpar, Aug 7, 2009.

  1. dhpar


    recently we have had a deja vu in CL nearbys. the first and second is of by about twice the cost of carry. what does it mean?

    anybody buying first and selling second while carrying crude in storage makes about $1/bbl. why this arb does not work?

    is it because there is no storage? - i though the balance at cushing got better in the past few weeks...

    are there no tankers available? - i don't know and i doubt it given the collapse of the world trade in the past year...

    or does it portend lack of cash a la beginning of this year? - therefore moving value to paper second nearby as opposed to first nearby?

    or does it signify a coming selloff in crude?

    any comments appreciated...
  2. dhpar


    thanks for the article. that basically summarizes my sentiment in layman language.

    i just do not know what to make out of all of this. the spread between 1st and 2nd was continually increasing in the past few days which is not what one would expect while tankers are being chartered, i.e. i would expect the spread to get tighter while carry trade kicks in. somebody still sells september vs october, i.e. doing exactly the opposite... and given the chartered VLCC tankers this must be done in huge amounts. remember amaranth/hunter?

    who is buying october when september and storage implies such a huge glut?
  3. USO due to their rollover and goldmansachs is front running (like everybody else).

  4. dhpar


  5. The contango is steeper in WTI than Brent for example and there are rumors that Canadians are dumping oil on Cushing. http://www.cnbc.com/id/32315028 (surprisingly the link's from CNBC)

    nymex wti sep/mar (6 months) -$6.49
    ice brent sep/mar -$3.03

    Moving away from the front month (in part b/c wti expires before regular ICE brent & b/c of front month volatility) this is still present but less so.

    wti oct/apr -$5.28
    brent oct/apr -$4.03

    But I wonder how much of the contango can be explained by improving outlooks for the economy in 2010 and beyond. Oil inventories can be guzzled pretty quickly, and the supply picture isn't pretty, esp considering the abysmal investment in new oil. The IEA's chief economist expects a terrible supply problem, as do Goldman and others. Even the Saudi oil minister expects oil back at $150 when the global economy expands again.

    So these expectations should logically pick the futures chain up by its tail so to speak... Am I missing something (of course it's possible). The fall in oil prices has been completely a result of lowered demand, not increased supply.

    The the energy crisis (which kicked off this recession by putting pressure on the housing market among other things) is not over, it's just been dormant during this period of lower demand. And I believe that the energy/commodity supply crisis began the recession.

    Another, secondary question -- how much can currency outlooks affect the futures chain? This is a question I've wondered several times, and not just for oil. For example if the oil market had more traders who fear the risk of a dollar crisis, then where would that perceived risk show up? In a contango?

    Finally, the price of oil is very troubling, since it has been well-argued (http://www.epmag.com/WebOnly2009/item41209.php) that oil over $80 in today's dollars causes a US recession. Which might mean we'll be triggering a new recession just as we exit this one.

    This could imply that oil won't make it over $150 again as demand is too fragile already -- in today's dollars that is because fighting a commodity supply crisis with lower interest rates could well bring the price of everything else up rather than bring the price of oil down (and I write this despite having been in the deflation camp for most of the current recession).

    Thoughts? Is the contango simply a window on future higher prices?
  6. That bit about interest rates was unclear -- what I meant was that if a future recession were caused by high oil & commodity costs, interest rates -- esp if already low -- might not be effective.

    Witness the stagflation of the Seventies. A price shock because of supply constraints (US peak oil production in the early Seventies leading to OPEC's pricing power) led to a recession which was battled by lowering interest rates, and this led to rapid inflation.

    The same problem might occur again, especially if (a big if) Asian demand were to continue to increase even as a US recession hammered US oil demand.

    Gregor at Gregor.us has noted that emerging market oil demand may be more inelastic than advanced nation demand not only because gov'ts set prices, but also because access to a car brings greater relative returns to a poor person than to one of us. Why?

    Here's Gregor on the matter:

    Why bring this up? If economies decoupled to some degree, it would seem reasonable to imagine a US recession having less effect on the price of oil than has previously been the case. This would compound the problem of stagnant (or declining) oil supply growth. If US demand loses some of its pricing power on oil, as US supply did in the Seventies, and if we add to that stagnating oil supply, then we may find ourselves in recessions which cannot be dug out of by lowered interest rates or quantitative easing. I certainly hope not, but with crude over $70 despite a terribly weak economy, and with the speculator-filled front months being the lowest and commercials-filled back months being highest priced, things aren't looking so great...
  7. taojaxx


    First of all, the current recession has been caused by the housing market crash with no relevance of energy prices: the bubble burst because double digit price increases simply are unsustainable and the Fed increased interest rates 425 bp (from 1% to 5.25%) between end 2003 and July 2006.
    How much decoupling will occur with non OECD growing while advanced economies remain sluggish, I don't know but I have a sinking feeling growth in Asia was entirely based on exports so if we don't grow it's unclear to me whom they're going to export to.
    Finally how much future growth is there in the contango? probably quite a bit but this USO roll doesn't help either. Some day a simple solution may occur: rather than having the whole freaking position on the front month as of today, these guys may do as their competitor (DBO) which rolls the stuff to whatever the cheapest month is. Simple, clean and adequate: as a buy and hold kind of investor, these guys don't need the prompt month liquidity, so it beats me why they would concentrate their holdings upfront.
  8. dhpar


    i am mostly with day4night on this.

    i too believe in energy crisis in future + i believe that this economic crisis was caused mainly by 4+ gasoline. that kicked everything off and took skeletons out off closet: like housing. the credit crunch followed as a consequence which pulled of more skeletons still (like madoff).

    thinking about it this way brings different appreciation of fed lowering the rates last spring and pumping the crude/cmdties (via inflation expectations) just when the economy was the most vulnerable.

    chinese economy is not very dependent on exports - this myth was discussed in many papers. therefore i do not see a reason why they could not "decouple" from the west.

    in fact i believe that all this mess is in fact not the crisis in a global sense. it is just the long time expected (and long overdue) rebalancing of the world economy with respect to consumption, investment and spending. in few years time all will be quite again - just the ballance of power will be shifted east.

    not sure this means much for nearby contango though which was a topic of this thread.
    #10     Aug 9, 2009