The Two Best Oil Signals Now Agree: Oil is About to Move Upby DR. KENT MOORS
Contango
Contango simply means that oil for immediate delivery trades at a discount to oil to be delivered in the future. In other words, as you go further along the 12-month strip, oil for delivery on consecutive months gets more expensive.
This discount for oil for immediate delivery is typically a sign of a supply glut, because when oil storage fills up, putting more oil in storage gets more and more expensive. That makes storing oil for delivery in the future more expensive than delivering it now, creating the contango discount.
Straightforwardly, oil prices for future delivery being higher than for immediate delivery also means that the market expects oil prices – if left to their own devices – will rise.
Bacwardation
Bacwardation, on the other hand, is the name for oil for immediate delivery trading at a premium to oil for delivery in the future.
This is typically a sign of shortage fears – the market is so worried about being able to get oil today, it’s willing to pay a premium over oil for delivery tomorrow.
The implication is that oil prices will go down in the future. on the other hand, is the name for oil for immediate delivery trading at a premium to oil for delivery in the future.
The implication is that oil prices will go down in the future.
The contango of the 12-month NYMEX Strip is now constricting, with the discount for immediate delivery over future deliveries diminishing.
At the same time, the price for each month is rising. That means the all-important oil price floor is rising as well.
The NYMEX Strip tells us what to expect from US prices. The Brent spread, on the other hand, is a key indicator of what to expect internationally, as Brent is used more often than WTI as the benchmark against which global oil deals are made.
The Brent spread is also in contango, but the difference between the near-month and six-month out prices is contracting.
This, again, tells us higher prices are coming.
There are two important conclusions to draw from these two signals. First, both of these developments indicate that excess supply in the market is declining.
In addition to supporting a floor for WTI and Brent, it also means that the ephemeral “balance,” the essential component in strengthening oil prices, is taking shape.
Second, speculators will continue to search for ways of playing another spread, then between WTI and Brent. With the exception of only a few trading sessions, that spread has produced a higher price for Brent than WTI in each daily trading session since mid-August of 2010.
That spread, on the other hand, is also diminishing. And with both the NYMEX Strip (WTI) and the six month spread (Brent) pointing to continuing contango along the curve, another interesting trading conclusion follows.
It’s impossible to play the spread without “buying into” the contango. That is, any speculator trying to get a return from the discount on oil for immediate delivery, will in effect increase the demand for near-month oil futures.
That will only add to the pressure that is increasing prices.
Expect to see oil in the mid $50s by the end of this year, rising to the low $60s a barrel in the first quarter of 2017.
Source: Oil & Energy Investor
http://oilandenergyinvestor.com/2016/09 ... 3#deeplink
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