Contango!
… As a result of future supply concerns, long-term oil contracts - which had been trading $8 to $10 cheaper than the current front-month contract as early as 2 weeks ago - are now trading much higher. Oil for December 2016 delivery was trading at $140.30 on Thursday.
When a long-term contract is trading lower than the front-month contract, traders usually believe supplies will grow in the future and are inadequate now. That phenomenon is known as "backwardation" and often leads to higher prices in the current month.
When contracts that are far in the future are trading higher than the current contract, that usually means that supplies are adequate now and may fall off in the future. Called "contango," traders often sell off front-month oil when those conditions occur - leading to a burst in crude's bubble.
But don't expect prices to fall off the cliff this time, because traders believe supplies are too low now and will be even less sufficient in the future. That may just lead to high prices this month with even higher prices down the road.
Supply and demand or speculation?
Many Americans find it hard to believe that global demand for oil is rising, since demand is slumping at home amid a struggling U.S. economy that also has concerns about inflation. But some global economies - namely China - are much stronger now. Since oil is a dollar-traded commodity, a weakened dollar has made crude look relatively cheap to some foreign nations.
"Discount the speculation idea completely - fundamentals are really driving things," said Barclays Capital commodities analyst Kevin Norrish. "Oil demand is still strong, but non-OPEC supplies have fallen very sharply, especially in Russia."
The report from the IEA is the latest in a string of bleak supply news. On Wednesday, the U.S. Energy Information Administration said U.S. crude supplies declined unexpectedly. According to Kilduff, Mexican production is down 6% year-over-year, the Nigerian region's oil production can be lost completely when rebels attack, and ExxonMobil Corp. (XOM, Fortune 500) reported an 11% decline in production in its latest earnings report.
"If ExxonMobil isn't able to up production to capitalize on oil in the triple digits, then there must be problems with oil supplies," said Kilduff.
Some analysts, however, believe that many commodities investors have boosted the price of crude with speculative trading, treating oil as a hedge against inflation due to the weakened dollar.
"You can't swing a cat without hitting a barrel of crude oil here: We have an over-supply in the United States," said Stephen Schork, editor of the energy industry newsletter The Schork Report. Schork estimates crude should be trading between $85 to $90 a barrel, given how oil has traded over the past 6 years. Accordingly, he thinks about $45 to $50 of crude's price can be chalked up to speculation.
"Saying this market is all supply and demand is absolutely ludicrous," he added.
http://money.cnn.com/2008/05/22/news/economy/gas_prices/index.htm
When a long-term contract is trading lower than the front-month contract, traders usually believe supplies will grow in the future and are inadequate now. That phenomenon is known as "backwardation" and often leads to higher prices in the current month.
When contracts that are far in the future are trading higher than the current contract, that usually means that supplies are adequate now and may fall off in the future. Called "contango," traders often sell off front-month oil when those conditions occur - leading to a burst in crude's bubble.
But don't expect prices to fall off the cliff this time, because traders believe supplies are too low now and will be even less sufficient in the future. That may just lead to high prices this month with even higher prices down the road.
Supply and demand or speculation?
Many Americans find it hard to believe that global demand for oil is rising, since demand is slumping at home amid a struggling U.S. economy that also has concerns about inflation. But some global economies - namely China - are much stronger now. Since oil is a dollar-traded commodity, a weakened dollar has made crude look relatively cheap to some foreign nations.
"Discount the speculation idea completely - fundamentals are really driving things," said Barclays Capital commodities analyst Kevin Norrish. "Oil demand is still strong, but non-OPEC supplies have fallen very sharply, especially in Russia."
The report from the IEA is the latest in a string of bleak supply news. On Wednesday, the U.S. Energy Information Administration said U.S. crude supplies declined unexpectedly. According to Kilduff, Mexican production is down 6% year-over-year, the Nigerian region's oil production can be lost completely when rebels attack, and ExxonMobil Corp. (XOM, Fortune 500) reported an 11% decline in production in its latest earnings report.
"If ExxonMobil isn't able to up production to capitalize on oil in the triple digits, then there must be problems with oil supplies," said Kilduff.
Some analysts, however, believe that many commodities investors have boosted the price of crude with speculative trading, treating oil as a hedge against inflation due to the weakened dollar.
"You can't swing a cat without hitting a barrel of crude oil here: We have an over-supply in the United States," said Stephen Schork, editor of the energy industry newsletter The Schork Report. Schork estimates crude should be trading between $85 to $90 a barrel, given how oil has traded over the past 6 years. Accordingly, he thinks about $45 to $50 of crude's price can be chalked up to speculation.
"Saying this market is all supply and demand is absolutely ludicrous," he added.
http://money.cnn.com/2008/05/22/news/economy/gas_prices/index.htm