The oil market opened down about $0.70 per barrel, then closed generally higher. The movement is not in line with general oil market movements in which the greatest price rise or fall is reflected in the close in contract, and markets several months out move relatively slowly.........the far out contracts rose much more than the near in contracts, as indicated by the settlement prices below (courtesy of Fox Investments, through Future Source)

Feb=====-.05====25.55
Mar=====+.05
Apr=====+.14
May=====+.20
Jun=====+.22
Jul=====+.23
Aug=====+.23
Sep=====+.24
Oct=====+.26
Nov=====+.28
Dec=====+.29

I think this would be an indication that someone suspects that not only are oil prices not going down a lot, but that delivery problems might be surfacing behind the scene. Any comments, Downstreamer, RC, Gordon?

-- rocky knolls (rknolls@no.spam), January 04, 2000

Answers

The back months are so thin even a small player like me can spike it up. I would see if it develops into a trend where the calendar spread narrows.

If you see the back months continue to be stronger than the front months, I'd suggest you do a spread trade rather than an outright purchase based on your theory.

BTW, the large players don't usually play the back months because liquidity isn't enough for the size they have to do.

-- Sandwich (anon@anon.anon), January 04, 2000.

Thanks, Sandwich. You're right, the back months are thin. There was a lot more trading than usual in them today......as many as 1000 October contracts. This might be normal, but I remember seeing numbers like a couple of hundred contracts. It will bear watching, I guess.

-- rocky (rknolls@no.spam), January 04, 2000.

Murphy's law pertaining to thin market trading: There's always enuf liquidity to get in but never enuf when you must get out of ur position!

-- Sandwich (anon@anon.anon), January 04, 2000.

Commodity markets are priced for cash and carry. This means the price for future delivery must reflect the spot level plus costs to store, insure and finance to the delivery date. This is known as the "contango". This typically has the nearby contracts priced at a discount to the more distant delivery months to reflect the cost of carry.

When spot and the nearby contracts trade at a premium to the more distant delivery months, this is the sign of immediate shortage of supply and a notion by the market that prices will ease in the future. This pricing structure is called "backwardization"

The oil market has been in backwardization for quite a while now. Supplies for immediate delivery have been tight. It now seems the market is sensing that the more distant delivery months may face supply problems.

This is all very very bullish!

-- Ishkabibble (ishman@home.com), January 04, 2000.