As the CFTC organises an international posse to chase after suspected crooks manipulating the crude oil futures market, the regulators might want to reflect on an inconvenient fact: forward prices for crude point to a FALL in prices.
Exhibit 1 — a chart from Sempra Metal’s John Kemp.
That’s a fall in real terms, of course, and adjusting for expected inflation. As Kemp points out in a note to Sempra clients:
The seller of a barrel of oil forward for delivery in Dec 2016 receives a small premium in nominal terms over the current spot price (about $10) but once the impact of expected inflation is taken into account the forward barrels are actually being sold at a discount (about $25). The seller receives $140 per bbl in Dec 2016 but that will be worth only $105 in today’s money if inflation runs at 3.5% per year in the meantime.
It is important to remember that forward prices are not a forecast of where spot prices will be in the future – there are too many variables for that to be the case. But they do show the price at which a firm agreement can be struck to buy or sell commodities now for delivery at these future dates. And in Kemp’s view this could be an investment opportunity.
But for investors with a bullish long-term view on oil prices grounded in long-term exploration and production difficulties and strong demand growth from China, India and other emerging economies, a Malthusian view about population-driven demand outstripping the supply of raw materials, or simply concerns about a long-term increase in the inflation rate from 2% to 3.5% or more, then the far forward commodity futures look like a very cheap way to obtain exposure to commodity markets in the long term. In effect, they offer exposure at a deep discount to the current spot price.
For an institutional investor with a long time horizon looking to gain exposure to commodities, buying far forward futures looks like a much more attractive vehicle than buying futures maturing in 2008-2012.
Related links:
CFTC Announces Multiple Energy Market Initiatives – CFTC statement
Police called in to investigate oil price rise – FT Alphaville
Futures watchdog investigates oil market – FT story