Any thoughts on why WTI contango narrowed sharply past few days?

M

markettimer

I noticed April crude futures (CLJ5) sharply outperformed May (CLK5) and June (CLM5) futures the past few days, coinciding with the upcoming expiration of the April contract. Any thoughts on why this happened?
 
markettimer said:
I noticed April crude futures (CLJ5) sharply outperformed May (CLK5) and June (CLM5) futures the past few days, coinciding with the upcoming expiration of the April contract. Any thoughts on why this happened?
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Yes, it is mostly a function of the fact that the front month contracts tend to be more volatile than back month contracts. So if there is a decline (say, over a period of days) the front month will often/usually be down more points. If there is a rise, the front month will be up more. So basically on the decline prior to this rally, the spread widened as the front month declined more than contracts a few months back. As the market rallied for a few days, the front month increased more and consequently the spread decreased.
 
The FOMC certainly lifted crude on Wednesday (3/18), but the front month outperformance actually happened on Thursday and Friday.

Here are the closing prices for 3/17, 3/18, 3/19, and 3/20:

CLJ5: 42.43, 44.69, 43.85, 45.87
CLM5: 46.37, 48.8, 47.54, 48.34

And here are the daily changes for 3/18 - 3/20:

CLJ5: +2.26, -0.84, +2.02
CLM5: +2.43, -1.26, +0.8

The beta hypothesis would have had CLJ5 outperform on Wednesday (didn't happen). The price action on Wednesday doesn't support the FOMC hypothesis for narrowing contango either.
 
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