How would a potential carbon tax affect oil prices?

S

Soo84

Hey Guys,

I'm really new to trading and looking to learn more about futures and trading oil.

Let's say I have a view that developed nations are going to be far more bullish on carbon taxes than anyone predicts and that these taxes are going to roll out in the next 2-5 years.

My understanding of Crude Oil futures is that it's typically "hump shaped", in that futures are in contango for the front months and then backwardated in the back months (as Crude sellers are willing to sell at a loss to reduce risk.)

If I want to place a trade based off my view on carbon taxes, would I go short the back-months?

Increased carbon taxes would result in a decrease in the demand for oil resulting in lower oil prices?

Or would this be a poor way to place the trade as increased carbon taxes would mean Oil producers will cut production (as they realize the quantity demanded will be less).

Thanks for reading and sorry for the noob questions.
 
Soo84 said:
Hey Guys,

I'm really new to trading and looking to learn more about futures and trading oil.

Let's say I have a view that developed nations are going to be far more bullish on carbon taxes than anyone predicts and that these taxes are going to roll out in the next 2-5 years.

My understanding of Crude Oil futures is that it's typically "hump shaped", in that futures are in contango for the front months and then backwardated in the back months (as Crude sellers are willing to sell at a loss to reduce risk.)

If I want to place a trade based off my view on carbon taxes, would I go short the back-months?

Increased carbon taxes would result in a decrease in the demand for oil resulting in lower oil prices?

Or would this be a poor way to place the trade as increased carbon taxes would mean Oil producers will cut production (as they realize the quantity demanded will be less).

Thanks for reading and sorry for the noob questions.
More...

Trading oil for the sake of supply and demand is one thing. But then trying to figure out contango and backwardation curves based on carbon taxes and credits? That is a whole other ball of wax that just over complicates things, IMHO.

Here is all you need to know about oil. Draw your conclusions from this point. And welcome to EliteTrader. It is a fun place.

 
It's an interesting question you bring up. One important additional item to add to things to think about is that futures curves in a somewhat storable commodity like oil don't necessarily entirely reflect the consensus future price for that commodity since if the futures get too out of whack with the spot it can be arb'd. Not easily like currency, but to some extent you can store oil on tankers for future delivery if the future price exceeds the spot price by more than the cost to lease the oil tanker, for example.
Overall the problem with predicting oil prices is that they're so tied to so many other things, from the world economy to some completely out of the blue random thing like coronavirus. So you could model what you're trying to model with 100% realized accuracy, and still end up losing a ton of money because while you modeled your effect correctly in only accounted for 3% of the price change in oil prices.....and they changed by a total of 30%!
 
dozu888 said:
NEVER GONNA HAPPEN WITH TRUMP BEING THE PREZ.
More...
%%
And DAL noted they were buying carbon offsets so they planned ,LOL. DAL is a downtrend looking for a downtrend to happen, generally speaking. So for oil ;its a nothing burger, most likely.............................................................................................
 
I am personally more aligned with the theory that carbon taxes are much more effective in developed, advanced countries - and that for developing countries, they are regressive and will in all likelihood have a counterproductive consequence on the environment.

If we make fossil fuels availability economically unfeasible for the poor - they will denude forests in order to find fuel for cooking and heating. I would argue that it is better to even subsidize cleaner burning fuels like propane or natural gas for cooking and heating than it would be to encourage deforestation.
 
You must log in or register to reply here.
Back
Top