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Oil Backwardation

  • 10-09-2018 11:19am
    #1
    Closed Accounts Posts: 55 ✭✭✭ RedRebel92


    Was reading about the current backwardation in the oil market and was wondering if someone could clear somethings up for me.

    So currently there is a supply shortage between OPEC production cuts, US rigs declining and the expected US sanctions against Iran. All these have lead to an increase in oil price.

    But given the backwardation in the futures market, this supply shortage is not expected to last (due to I'm assuming the trade war between the US and China and the weakness in emerging markets).

    So is the correct outlook for the price of oil that it will go up in the short term but will then decline over time?


Comments

  • Registered Users Posts: 7,494 ✭✭✭ BrokenArrows


    RedRebel92 wrote: »
    Was reading about the current backwardation in the oil market and was wondering if someone could clear somethings up for me.

    So currently there is a supply shortage between OPEC production cuts, US rigs declining and the expected US sanctions against Iran. All these have lead to an increase in oil price.

    But given the backwardation in the futures market, this supply shortage is not expected to last (due to I'm assuming the trade war between the US and China and the weakness in emerging markets).

    So is the correct outlook for the price of oil that it will go up in the short term but will then decline over time?

    Oil is guaranteed in the long term to decline. Its all dependent on how quickly economies switch to being renewable and electric.

    Paris for example plans to ban all non electric vehicles by 2030 and the UK i believe has a proposal for 2050. If other countries follow a similar timeline and electric vehicles become more common than petrol/diesel in the next 20 years then a decline will come quickly.

    However there is a chance that the price will remain highish if a large number of current oil producers go out of business. Because production quantity will be lower then the supply/demand ratio will keep the price up.

    The question you need to ask yourself is how long are you looking to invest and if you can profit in a short term rise but an inevitable fall.


  • Closed Accounts Posts: 55 ✭✭✭ RedRebel92


    I understand your long term view of oil and you make good points, but I am more wondering about the price within the next year and what is causing the current backwardation.

    Not looking to invest in oil just trying to understand the current market state a bit better.


  • Registered Users Posts: 1,527 ✭✭✭ ballyharpat


    I don't believe that oil is going to fall (and stay down) in the long term.
    There are more vehicles on the road, more houses being built, fuel needed for electric. Fuel needed for products such as plastic etc. Less easily accessible oil, fracking coul be stopped I believe. Emerging markets have not agreed to ban non electric vehicles. Demand will increase, even BP and the other large companies agree on this, but they are still investing massively in solar/wind power etc.

    it will take way more than 12 years to put a stop to cars using fuel.

    I believe we are on target for a fair value of around $100 per barrel. It will probably overshoot, but would settle around there with fluctuations. Oil companies have not invested in finding new sources or drilling new wells for the last 3 or 4 years, massive investment is needed there.

    Of course, I could be completely wrong, it is speculation, but that is my train of thought.


  • Registered Users Posts: 212 ✭✭ Mach 3


    There is a near $10 spread between WTI and Brent crude. It could be one way to play it.


  • Registered Users Posts: 212 ✭✭ Mach 3


    Smashed through the $10 barrier this week (contract on contract) hit $11 but retraced quickly.
    Outside down (weeeky) follow through on both.


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  • Registered Users Posts: 2,435 ixus


    Curve doesn't mean anything to mortals. We were talking super contago 2015/16 and $0 oil potentially ( not really). Now we're talking $1/200 ... despite the collapse in car sales in China and rest of world....

    Brent/wti is a fools spread. It's not fungible. Only for physical traders.

    It could go anywhere with Saudi Arabia. Restricted supply or demand destruction.

    Did you know oil prices in EM currencies is back to 2008 levels i.e. $147.


  • Registered Users Posts: 212 ✭✭ Mach 3


    ixus wrote: »
    Curve doesn't mean anything to mortals. We were talking super contago 2015/16 and $0 oil potentially ( not really). Now we're talking $1/200 ... despite the collapse in car sales in China and rest of world....

    Brent/wti is a fools spread. It's not fungible. Only for physical traders.

    It could go anywhere with Saudi Arabia. Restricted supply or demand destruction.

    Did you know oil prices in EM currencies is back to 2008 levels i.e. $147.

    Yes indeed I remember the talk of contango well, I also remember telling you when the bottom was in, but you didn't listen then either.


  • Registered Users Posts: 2,435 ixus


    It must have been under a different username seeing as you only logged this in late 2017....

    In regards to market calls, I'm pretty sure I've rarely made one on here.

    I will often highlight factors influencing prices or why a poster may be wrong (what they are missing).

    Brent and WTI have no true relationship. They do not go bid solely because the other one does. They can actually go opposite directions. WTI is chiefly focussed on domestic logistics and cracking products.

    How the spread moves is typically noise at the front of the curve. Its the longer dated contracts that matter. 6/12 months and more.

    Brent will not rally $1 because WTI rallies $2 due to weather in the East coast. It doesn't work that way. Traded it as my job for long enough to have a solid opinion on it.

    Am open to hearing your logic though.


  • Registered Users Posts: 212 ✭✭ Mach 3


    The OP asked about backwardation, to which I highlighted the spread, so as it would not be looked at one dimensionality.

    I was also tying up a loose end when the $10 barrier was broken and also highlighted the fact that both Brent and WTI have potentially made a swing high on the weekly chart. Does this happen often?

    On a lighter note I read that "did you know...." in the voice of Michael Caine.


  • Registered Users Posts: 2,435 ixus


    That is some turn. Longest 10 day losing streak ever at over 20% move. Savage stuff.


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  • Registered Users Posts: 212 ✭✭ Mach 3


    Wti twice breeched the $50 handle late this week and twice snapped(rubber band) back above. We have had a turbulent 8/9 of weeks across all markets, but with the midterms, Fed and trade war largely behind us (for this year anyway), why did we get that 30%ish drop in Oil?
    There are way better guys than I on Oil fundies, but the talking heads across seem to blame a lot of this drop on hedge funds having to cut positions, or when all else fails, pick the one excuse that is the most plausible.
    I can only imagine if one traded Oil - the start of the drop would have had the same confusion as the move in other markets.
    The fact that Correlations have broken down, leads to the the conclusion - buy everything one of them will work?
    Wheras in reality the real answer ~is buy everything they will all work(till new year anyway).


  • Registered Users Posts: 212 ✭✭ Mach 3


    Futures close this week:

    - S&P 2763.75
    - DXY 97.12
    - WTI 50.70
    - US 10Y 119. 67

    Edit : I suppose for pc purposes CRYpto should get a figure but then again, maybe not.


  • Registered Users Posts: 212 ✭✭ Mach 3


    Mach 3 wrote: »
    Futures close this week:

    - S&P 2763.75
    - DXY 97.12
    - WTI 50.70
    - US 10Y 119. 67

    Quick update at end of year:

    - S&P 2508
    - DXY 95.70
    - WTI 45.84
    - US 10Y 121.89

    Horrible stuff, and extremely costly.


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