Commodity Corner

Views on commodities and energy

Oil Market Contango Widening

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0709-contango-fig-11The 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)0709-contango-fig-2The 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. 0709-contango-fig-30709-contango-fig-41

Correlation Between Oil and Equities Markets

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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

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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

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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.