Commodity Corner
Views on commodities and energy
Oil Market Contango Widening
The spread between front-month oil futures and contracts for later delivery on the New York Mercantile Exchange (see Fig. 1) has widened dramatically this month. (See Fig. 2)The widening contango frequently portends a rise in inventories. For example, in Fig. 3, it can be seen that when the discount for fronth-month crude to second-month crude widened to near $4 a barrel earlier this year, inventories jumped to 19-year highs. The relationship between inventories and the outright futures price can be seen in Fig. 4.
Correlation Between Oil and Equities Markets
Oil prices have been trading in an unusually strong positive correlation with equities markets over the past few months on hopes that signs of an economic recovery could mean a boost for energy demand.
But with oil and product inventories swelling and little sign of demand improving in the United States and other big developed economies, analysts warn that the linkage may be hard to maintain, especially if U.S. motorists cut back on vacations this summer.
We are not at the economic threshold of return yet where we can handle higher prices in energies. If energies run up the economy will be pushed deeper into recession, perhaps even depression. The energy bubble caused a chain reaction of dissent in over-all financial stability. If energies…specifically oil began moving up at this time we will face economic times like we have not experienced for 70 years.
U.S. Gasoline Demand
U.S. gasoline demand has showed signs of picking up over the past month, edging up 1.6 percent over the past for weeks according to government data. Analysts say lower pump prices have led some Americans to drive more. U.S. demand fell last year for the first time since 1991 as gasoline and crude prices raced to record highs, with further pressure coming later in the year due to the economic crisis.
The above graph shows five years of gasoline consumption in the world’s top consumer, compared with the average price for a gallon of U.S. gasoline.
