Wednesday, August 27, 2008

Spot Life of CL Sep '08

I've been keeping close track of the oil markets for some time now and thought that the blog might be a good way to record the history of its movements and any market analysis that might come along the way. So here is the spot life of the September 2008 contract for CL (sweet light crude) on NYMEX. In order to make this task more manageable, I might decide to post these on a 7 days-trading basis instead of for the entire spot month.

September 2008 was an interesting contract insofar as it saw the price of crude come down about $10/b and included the lowest spot price seen in quite a few months, though it moved up a bit from that since. The following table tried to tabulate the daily reported reasons for changes in price (as well as some other public information I noticed that was important) and to categorize it, so that it's movement will be somewhat easier to follow. The file is way too large to show in this format, but I'm hoping you can click on it and you will see it in a readable size ... and perhaps print it out ... I will work on ways to make this easier to read in the future.

You will note that a popular explanation of the rise and fall of the price of oil has been to look at the Euro-Dollar exchange rates. Obviously, these must have some effect on the valuation of oil, but I suspect that oil has it's own influence upon both currencies and, from my observations, it looks as if the Euro has been following crude down, not leading it.

Below you'll see a chart for the CL NYMEX futures contract prices for spot and then various forward months. Generally speaking, the oil market is in backwardation, which means that the price that people will pay for oil further away from the present is less than the spot, or closest delivery contract date. Theoretically, backwardation should encourage producers and those who have product in storage to sell now, because why pay for storage in expectation of a future price that is less than the current one? (But it doesn't really necessarily work that way in practice.)

However, recently, CL has been in contango, which means that the price people will pay today for futures contracts for months beyond the spot month is higher than for spot. Theoretically, this should mean that there is incentive to store production and sell later, in expectation of a higher price then. Futures allow one to lock in the price, of course. But it doesn't really work that way in practice.

Still, it is an anomaly, which industry folks tend to talk about. Note that the Sep 08 contract goes into backwardation for the period of a single day--on August 7th--and then moves back into contango. On August 7th, BP announced it would take about two weeks for repairs of the BTC pipeline to be completed. Also, Shell announced that repairs on a major Nigerian pipeline were still underway.

Right now the current spot contract--for October--is in deep contango, meaning that the future prices are much higher than spot price, and that this is true of every single contract through December 2016. This is partially because of Gustav heading that way. Also probably because of increasing nervousness with respect to the Georgia / Russia conflict. I would point out that these are all political / meterological risks to supply, not directional supply and demand numbers.

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