The Great Debate

Don’t bank on return of backwardation

Many energy analysts are predicting the crude market will move into backwardation before the end of the year.

Increasing demand and rising refinery runs will, in their view, reverse the unusual build up of inventories around the NYMEX delivery point at Cushing, and the market should revert to a more normal term structure.

The extreme contango visible at the front end of the NYMEX futures curve in the last seven weeks is certainly evidence of a “dislocation” caused by congestion around the delivery point. Front-month NYMEX futures have been trading at abnormally large discounts not only to second- and third-month NYMEX futures but also to Brent and other spot crudes such as Tapis.

Recent upticks in refinery runs, coupled with the forthcoming driving season, and continued economic recovery, have the potential to tighten the markets for crude oil and refined products over the summer. The question is whether this will simply narrow the contango from its current extreme level or push the market level or even into a backwardation.
Recent experience suggests the contango is set to narrow, but will not disappear entirely. Contango, not backwardation, is the “new normal” in oil markets.

Before 2005, WTI crude prices were more often in backwardation than contango. Backwardations were both larger and more frequent than contango (Charts 1-4).
(1) http://graphics.thomsonreuters.com/ce/CL-STRUC-1.pdf

NYMEX oil benchmark again in question

John Kemp Great Debate– John Kemp is a Reuters columnist.  The views expressed are his own –

The record differential between the front-month and more liquid second-month contracts at expiry last week once again raised pointed questions about whether the NYMEX light sweet contract is serving as a good benchmark for the global oil market, or sending misleading signals about the state of supply and demand.

The expiring January 2009 contract ended down $2.35 on Friday at $33.87, while the more liquid February contract actually rose 69 cents to settle at $42.36 – an unprecedented contango from one month to the next of $8.49.

Bleak outlook for U.S. oil refiners

John Kemp Great Debate– John Kemp is a Reuters columnist. The views expressed are his own –

Even by the standards of a deep-cyclical industry, the “golden age” of oil refining has proved remarkably brief, lasting no more than three years, before giving way to a new dark age.

Particularly in the United States, refiners have returned to the state of chronic unprofitability that plagued the industry before 2005.