WTF! Since when is crude in contango
- Thread starter The Kin
- Start date
Supply concerns & acceptance of peak oil.
There's also interesting situation with inventories that no one is talking about. While we have reporting on inventories rising across the board and producers storage capacity at maximum (e.g. producers running out of storage and are holding crude on tankers sitting at sea). Conventional wisdom says production must decrease once storage capacity is maxed out, in other words, they can't pump more than they can sell + store.
However, the secret no one talks about is that the ratio of heavy vs. light oil stored is much different now than years past. The big supply/demand equation is not overall demand for oil that the main stream media talks about, it's the demand for light crude due to all of the custom gasoline blends.
So while producers have been selling light crude as fast as they can pump it, the heavy crude has been moving to storage.
The question to ask is what happens when producers can't move the heavy crude (even at a discount)? They have to pump less. That means even LESS light crude available. Prices skyrocket even higher despite inventory being maxed and oil dripping from sea-based and make-shift storage because no one wants the heavy crude.
There's also interesting situation with inventories that no one is talking about. While we have reporting on inventories rising across the board and producers storage capacity at maximum (e.g. producers running out of storage and are holding crude on tankers sitting at sea). Conventional wisdom says production must decrease once storage capacity is maxed out, in other words, they can't pump more than they can sell + store.
However, the secret no one talks about is that the ratio of heavy vs. light oil stored is much different now than years past. The big supply/demand equation is not overall demand for oil that the main stream media talks about, it's the demand for light crude due to all of the custom gasoline blends.
So while producers have been selling light crude as fast as they can pump it, the heavy crude has been moving to storage.
The question to ask is what happens when producers can't move the heavy crude (even at a discount)? They have to pump less. That means even LESS light crude available. Prices skyrocket even higher despite inventory being maxed and oil dripping from sea-based and make-shift storage because no one wants the heavy crude.
Its simple. Speculators make up a disproportionately high percentage of buyers of long dated futures. The nearby futures contracts are mostly held by the commercials.
When speculators rush in, the lower liquidity of long dated futures pushes the prices further in the direction of their orders, which have been buys. Thus going from backwardation to contango.
Add in the new found realization that the world can't increase oil supply despite high er prices and you have contango.
When speculators rush in, the lower liquidity of long dated futures pushes the prices further in the direction of their orders, which have been buys. Thus going from backwardation to contango.
Add in the new found realization that the world can't increase oil supply despite high er prices and you have contango.