EC Maybe The Biggest Challenge Is Not To Get Carried Away

Like a child fixated on a shiny new toy, I was enthralled by trading in WTI futures on Monday. There are times when end-of-day closing prices just don’t capture the full extent of what actually goes on during the several hours of any regular session, and yesterday was certainly one of those times.

We’ve been on top of front-end contango for some weeks now. At first wondering if merely an artifact of growing technical illiquidity as the lead contract lurches toward its expiration, then the upside-down spread was passed over to the next one in line. And it hasn’t been all that much, just a few pennies here or there. On the surface, surely not something to be riled up about.

Still, it’s not supposed to be there. A rip-roaring reopened economy stuffed to the brim with Uncle Sam’s cash freely floated along massive helicopter drops by all accounts would be one where demand exceeds supply (for oil as well as many other things) forever after. In oil futures, beautifully steep backwardation from beginning to end, near-term to far.

That had been the promise in WTI’s skyward ascent from early January forward; that however bad last year had been the combined thirteen-digit “rescues” would end up, in fact, rescuing the economy (globally) before anything truly bad and permanent set in. Normalcy, if not better, seemed palpably plausible – if for a time.

Around late February, the 24th, to be precise, complications arose. It’s arguable exactly what those were and how they might still be contributing or where.

For the crude oil market, specifically, it’s been the clear combination of front-end contango and flattening elsewhere both visibly corrupting the lovely backwardation. Yesterday, the 1-month calendar spread where the contango is right now, while the market as a whole sold off the very tip of the curve would see as much as a nickel, even $0.06 in contango during it.

What that suggests is serious imbalance over the immediate future; to pay out $0.05 per contract for some speculator or producer to put away some additional supply for at least a month. As oil sold off, the contango expanded and the rest of the curve flattened both indicating that such uncertainty is being extended beyond the current front two delivery months.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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