Anyone can explain this WTI backwardation?
- Thread starter UFBS
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I would not consider your trade an arb. You're still taking huge risk withdrawing from storage.
If you're long futures as a hedge for the barrels you now have to inject and prices fall, your gain buying the physical lower will be offset by the loss on futures. So now you have an inventory that you just paid above market prices for because of the "hedge".
1) You can give "blame/credit" to excessive speculative trading.
2) The deferred months are more dominated by "Big Oil" companies.
3) The front months have too many speculative traders over-trading, "too little", "actual" oil. :eek:
4) Get out of Jan14 and into Feb14 and stop worrying about "it".
Quote from nazzdack:
4) Get out of Jan14 and into Feb14 and stop worrying about "it".
Same thing lol, even worse since Feb is more expensive month, then after that prices start to decline but still spring months are much cheaper than summer months which is counter intuitive due to seasonality and supply/demand dynamics forecasted by EIA (among others)
You are not looking at the market the right way. It is not so much current tightness creating the backwardation as future increased production from North Dakota and Texas pushing future prices lower.
As far as the spring and summer months, do you bother to read industry news?
What has been the big story about Cushing for the last year?
Pipelines is the answer. In particular the Seaway Twin pipeline which will open in the 2nd quarter of 2014 taking another 450,000 barrels per day from Cushing. It is speculated that the opening of the new pipeline will lead to a glut in the Gulf Coast market by summer.
So the glut will move from Cushing to Coast and what's the difference? In terms of pipelines they should not have any effect, both Keystone and this one...
I suppose also it will be impossible to quickly raise refining capacity and export out the products, so yes the price might fall...but then why is market not pricing in that now?
If you look the quantities of oil in tankers are rising. Who wants to have oil in a tank, pay for storage and wait a proclaimed upcoming glut and lower prices coming with it?? They should be dumping everything right now then and there should be a slight contango in the front few months, like it was a month or two ago.
Only if someone knows something, i.e. that the OPEC is going to cut production in the spring or the production is going to disappoint or similar and there will be effectively no glut. Another possibility is a sharp drop in imports which could keep the WTI price level. That could be keeping oil in the tanks.
If someone will to hold their oil for whatever reasons, rest assured that they have everything hedged.
Spring (Feb-Mar) is currently more expensive than the summer (Apr-Oct) strip, so not sure why you suggest "spring months are much cheaper than summer."
Any seasonality in crude stems from the seasonality of the products, so you should consider HO and Rbob fundamentals in your dialogue.
Can you please cite a source for this?
Sorry, a mistake, spring months are much more EXPENSIVE than summer, that's counter-intuitive to seasonality.
Tanker inventories:
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRSFP31&f=M
Also here:
http://www.eia.gov/dnav/pet/pet_stoc_cu_s1_m.htm
Btw, rbob and ho are seasonally demanded in winter (ho) and summer (rbob). But in spring?? That doesn't justify the price premium for spring months compared to (cheaper) summer months futures.