Crude Oil In Backwardation While Brent Oil In Cantango

Crude oil continues to fall as analysts are now predicting that we could see prices fall below $75.00. An analyst this morning said that WTI crude oil is in backwardation and Brent Sea oil is in cantango simultaneously. What is backwardation, what is cantango? These effects usually happen when there is a glut of product on the market. Investopedia explains these effects in this manner. A contango market is often confused with a normal futures curve; and a normal backwardation market is confused with an inverted futures curve.  Contango is when the futures price is above the expected future spot price. Because the futures price must converge on the expected future spot price, contango implies that futures prices are falling over time as new information brings them into line with the expected future spot price.

Normal backwardation is when the futures price is below the expected future spot price. This is desirable for speculators who are “net long” in their positions: they want the futures price to increase. So, normal backwardation is when the futures prices are increasing.

Backwardation is the opposite of contango. When a market is experiencing backwardation, the contracts for future months are decreasing in value relative to the current and most recent months. The spot price is thus greater than the front month, which is greater than future delivery months. A market in backwardation is a bearish sign because traders expect prices over the long term to decrease.

When the front month trades higher than the current month, this market condition is known as contango. The market is also in contango when the price of the front month is higher than the spot market, and also when late delivery months are higher than near delivery months.

At present WTI crude oil eased by 27 cents this morning to trade at 80.73 while Brent oil is trading at 85.39 in the spot market. Crude oil for December is priced at 80.71 and for January at 80.37 and at 80.16 for February.

Prior Settle

Open

High

Low

Volume

Hi / Low Limit

 

DEC 2014

80.71

-0.29

81.00

80.64

80.79

80.45

3,574

91.00 / 71.00

   

JAN 2015

80.37 a

-0.33

80.70

80.35

80.41

80.12

798

90.70 / 70.70

   

FEB 2015

80.16

-0.32

80.48

80.11

80.18

79.98

164

90.48 / 70.48

   

MAR 2015

80.04 b

-0.30

80.34

80.00

80.00

80.00

20

90.34 / 70.34

   

After months-long tumbling crude prices, commodity index investors may soon have another reason to consider leaving the oil market: contango. For the first time since January, the U.S. West Texas Intermediate (WTI) crude oil futures market is poised to flip into contango, a structure in which prompt prices are below longer-dated contracts, typically signaling a weaker market. Outright oil prices have already tumbled about 25 percent since summer. In contango, passive investors in commodity indices end up selling cheaper prompt contracts and buying more costly next-month futures for a loss every time they have to roll their positions forward. Brent crude has been in contango for months. In the case of WTI, strong U.S. refinery demand and a decline in crude inventories earlier this year at Cushing, the delivery point for U.S. futures, had supported the market.