Commodity curve purists insist that long-term futures prices must not be confused with market forecasts.
People who do that are deemed commodity dummies because long-term futures are said to reflect the price at which market participants are prepared to buy or sell commodities in the future today. That generally means prices that make sense for them right now, but not necessarily those they expect in the future.
As a result, certain assumptions can be made about curve structures.
If long-dated futures are very much higher than spot prices, the market is offering premiums to those who have the capacity to take delivery today and store the oil until the future. It’s a dynamic that indicates an abundance of oil in the spot market today, rather than an expectation that prices will be higher tomorrow. It’s known as a contango market and is generally a bearish signal. Read more
From the IEA’s Oil Market Report released on Wednesday:
WTI prices were sliding again on Monday:
And we’re probably going lower due to a glut of Saudi and Middle Eastern crude entering the market. Read more
There were those who said it would never happen. Then there were those who said it wouldn’t matter even if it did happen. And there were those who recognised Saudi Arabia was probably panicking about the prospect of a destabilising cash burn situation as soon as the term Saudi America became a thing.
But, as the FT reports on Friday, Saudi cash burn is now not only a big thing, it’s an accelerating big thing: Read more
Oil prices, both Brent and WTI, remain depressed:
An inundated inbox means we’re slightly late to this, but it’s worth flagging up two days on regardless.
It’s the EIA’s take on the US crude system’s “l’embarass de richesses” problem.
Inventory levels at Cushing may be at a record high, they note, but not as a percentage of total working storage capacity.
The great thing about the Cushing storage system is that it’s a private market. That means whenever storage gets tight the incentive to build new capacity increases for commercial operators. Read more
Back in May 2008, nobody — especially regulators — had a clue about what was causing crude oil prices to spike to $100-per-barrel-levels, and mostly everyone was inclined to either blame “China” or “speculators” or some combination of the two.
But Michael Masters, a portfolio manager at Masters Capital Management, had a simple proposition. In the Senate committee hearings organised to figure out exactly what was going on, Masters testified that it was his belief that a new class of investor — one he dubbed the passive “index speculator” — had bulldozed his way into the market and distorted the usual price discovery process. Read more
While WTI crude prices fell through $50 per barrel levels on Monday, and still remain there on Tuesday… (chart via LiveCharts):
Here’s a great chart from Emad Mostaque, a strategist at Ecstrat, a new research company set up by Mostaque and former head of EM strategy at Deutsche Bank John-Paul Smith:
Russia geopolitical risk? Check. Middle East geopolitical risk? Check.
But commodity prices, and in particular oil prices, are doing nothing: Read more
A quick little follow up to our previous “crude wall” post.
It’s worth stressing that since the beginning of the year crude stocks in Cushing, the delivery point for WTI crude futures, have staged a remarkable reversal. Read more
These two charts come from Citi’s commodities research team:
They’re important. The reason being…well, we may have become used to talking about Saudi America, but we haven’t yet figured out the longer term consequences of America’s oil production resurgence. Read more
As we alluded to earlier, there is a battle taking place in the oil markets at the moment.
On one side there are conventional oil producers like Opec members desperate to stop oil prices from following the declining trajectory of the wider commodity complex. On the other side there are the new US shale oil producers, who — due to the US export ban — are unable to capture the full earnings potential of their production (on account of an inability to tap foreign bids directly).
The problem for Opec types is that the break-even rates they seek to defend are now too high to prevent the new class of producer from being incentivised to keep producing. This despite the fact that the export bottleneck only ends up transferring much of the profitability to the refining sector instead of the US producer. Read more
From JBC Energy on Monday:
As the analysts note, the North Dakota production surge — which was under appreciated by the industry even as recently as this time last year — is beginning to have “profound” effects on the oil markets: Read more
A picture, they say, is worth a thousand words. The same applies to some charts.
From the IEA’s latest market report on Wednesday:
The WTI-Brent spread is at a record wide of almost $20 per barrel. This isn’t, of course, what was supposed to happen.
As JBC Energy wrote on Thursday: Read more
Oil prices continue to decline, with WTI currently leading the charge:
There are three things that must be remembered when it comes to banks, trading houses and warehousing plays.
But even then, it only pays to store for as long as the commodity returns beat money-market returns. And that means, it only pays to store for as long as someone in the market is prepared to pay a premium for delivery of the commodity tomorrow rather than today. Read more
The fixed income team at Credit Suisse have a good note talking about what’s really driving WTI backwardation. Small hint, they don’t think it’s much to do with Egypt.
They put the backwardation down to three things. Read more
A while back we talked about the anomaly of backwardated curves amid a veritable abundance of US and global inventory.
Or more specifically, the irony that prices were falling even as curves were implying backwardation (usually a bullish signal reflective of tight supply). Read more
Lots of commentary is linking the mini-surge in WTI overnight, and subsequent WTI-Brent compression, to events in Egypt.
But it’s probably much more related to a shift in interest-rate expectations than anything to do with Middle Eastern tensions. Read more
… and it’s all because, the lady loves shale oil.
Well, what we mean is that finally, the surplus stock of crude trapped in America is having a price effect beyond borders because logistical constraints have been removed and storage incentives have started to disappear. Also, because graphs like these can no longer be ignored.
The result: a major narrowing in the WTI-Brent spread. Read more
Home of oil sands, maple syrup, ice hockey, singing astronauts, William Shatner, the Bank of England’s governor-to-be and (rather poignantly) a lot of bears… Read more
It’s been our mantra at FT Alphaville for a while, but finally someone from the ‘serious’ analyst space seems to agree with our hypothesis that commodity collateralisation — incentivised by low rates and excess liquidity — is having a larger impact on inventories and commodity prices than most people appreciate.
Here’s an extract from one of oil market veteran Philip K. Verleger’s recent articles on the relationship between interest rates and inventories (our emphasis): Read more
WTI crude prices are on the rise, but only at the expense of Brent’s premium. The spread between the two crude grades shrank below $8 this week, its lowest since January 2011.
But what’s really striking is the rise in US crude output, which has risen 57,000 barrels a day to 7.37m — its highest level since February 1992.
If one chart speaks a thousand words in this regard, it’s the following one from the American Enterprise Institute’s Carpe Diem’s blog, charting data from the US Department of Energy:
The number of cargoes that go towards determining the Dated Brent price is rising.
As Reuters reported on Thursday:
At least nine May cargoes have moved up the North Sea Forties crude programme after stronger-than-expected output from Britain’s Buzzard oilfield, the biggest contributor to the Forties stream.
According to the EIA, the definition of “spot market” is:
The price for a one-time open market transaction for immediate delivery of a specific quantity of product at a specific location where the commodity is purchased “on the spot” at current market rates.
An excellent observation from John Kemp over at Reuters on Tuesday regarding the spot/forward disconnect we’ve been talking about:
The increasingly close linkage between hedge funds and spot prices since 2010 has also coincided with a sharp reduction in the correlation between front-month and far-forward prices. Correlation between spot month and forward prices, generally above 90 percent until 2010, is now often less than 50 percent (Charts 5-6). Read more
Nymex WTI futures trade experienced somewhat of a wobble on Wednesday.
As Stephen Schork highlights in his chart of the day: Read more
This is a follow up to Thursday’s post about Rosneft’s 500 million barrel collateralised financing (to raise money for its purchase of BNP-TNK) and how the market managed to absorb it almost without any price impact.
Most of the previous post was based on the observations of Philip. K. Verleger, who believed the latter point represented a triumph for the futures markets, which had reached a whole new level of maturity.
And yet, as we have been reporting, it’s always more important to look to the curve. Spot price, or “flat price” as traders like to call it, is almost irrelevant. What’s happening in so-called time-spreads is usually much more critical. (And yes, nobody usually takes unhedged positions on flat price.) Read more