Commodity Corner

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.

NYMEX First to Second Month Crude Spread

The spread between the front month and second month oil futures continues to narrow.

The deep spread seen in earlier this year, caused primarily by slumping fuel demand due to the economic crisis, was heightened by the monthly of passive investment funds, especially the giant United States Oil Fund. On Feb. 6, when the fund last rolled its positions from the first to second month futures conracts, it held movre than 20 percent of the front month.

NYMEX Contango Narrows

The contango in the NYMEX futures curve has begun to narrow as OPEC production cuts begin to bite and U.S. gasoline demand shows signs of rebounding.

Open Interest in U.S. Crude Oil Futures

Open interest and trading volumes in commodity futures markets have shown some resilience at the start of 2009 despite the dramatic price slides triggered by the economic downturn.

In the fourth quarter of 2008, open interest in U.S. crude oil futures fell to levels not seen since mid-2006 as the global economic crisis hit fuel demand and sent prices tumbling, before rebounding.

Commodities roundup: Oil rally unleashed, how much more left

“Short squeeze, crude expiration — that’s it in a nutshell.”

So says Tom Knight of Truman Arnold in Texas of the near 16% surge in U.S. crude for October to $120.92 a barrel. Among other factors in the energy markets today: